Trusts are common, powerful estate planning tools. People can transfer various kinds of assets to various types of trusts for a number of reasons. Business owners, however, may stop short when thinking of transferring business interests to a trust. Will it mean a loss of control? Is the truly the best way to manage and transfer business assets?
Reasons to Transfer Business Interests to a Trust
To fund a trust, you need to transfer assets from your ownership to the trust. Assets that may be transferred include personal property, real estate, and business interests. As you might imagine, business interests may be a little more difficult to move. However, benefits include:
- Providing for a smooth transition of power and control during periods of your incapacity or after your passing, a Revocable Living Trust (RLT) is one of the most basic trust tools that business owners should employ.
- Avoiding or minimizing taxes by moving closely held or family business interests to a Grantor Retained Annuity Trust (“GRAT”). The grantor receives income for a time, then the remaining business interests transfers to the beneficiaries.
- A Grantor Retained Income Trust (GRIT) may be an effective way to give business interests to family members other than your immediate family. Think nieces and nephews and beyond.
- A Beneficiary Defective Inheritor’s Trust allows you to achieving asset protection for opportunities with higher upside appreciation potential taxed your tax rates rather than at trust tax rates (currently taxed at 37% federally).
As with any process, there may be a downside also.
Reasons Such a Transfer Might Not Be the Best Solution
Some business owners may feel a bit squeamish about relinquishing their business interests. And, in fact, there may be some downsides, like:
- Transferring S corporation business interests to certain types of trust may trigger negative tax consequences. In addition, after the business passes to your heirs, care must be taken to prevent the S corporation from reverting to a C corporation.
- Some business interests may lose marketability when transferred to a trust or make it more difficult to secure bank debt.
- Depending on the type of trust you use, your interests in the company may be diluted.
- Transferring interests to a trust may trigger provisions in your buy-sell agreement, if you have one.
Concerned About Transferring Business Interests to a Trust?
The consequences of creating a trust vary. As always, trusts should never be created with the advice of an experienced lawyer. Some trusts may be more beneficial to the business owner than others.
The attorneys at Virtus Law, PLLC, have the tools and experience to help you achieve the best result possible. To schedule an appointment, call us at 612.888.1000. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.