What Is a Trust in Business?

man and woman in a meeting

When most people think of a trust, they think of it as something rich people set up for their children. But a trust can have much wider uses than that, serving a range of people.

A trust is a legal entity where money, property, or assets belonging to one party (the settlor) is overseen by another (the trustee).

So what is a business trust? In this situation, the settlor is the business itself. The trustee (or trustees) manage the business in the service of beneficiaries. This relationship might be for a limited time, whereby upon ending the ownership of the business will transfer back fully to the beneficiaries. [1][2]

Benefits of a trust

What is a trust good for? Turns out, lots of things. With a trust you can[3] :

  • Control how your assets are distributed after death, similar to a will but with additional benefits
  • Protect assets from beneficiaries’ creditors
  • Provide support when a settlor is incapacitated
  • Manage the ownership and decision-making for a business after death

How do trust companies work?

You could think of a trust company as a professional trustee. Sometimes they exist within a bank, sometimes as a stand-alone business. As you can imagine, using a trust company gives you the benefit of their professional expertise. Sometimes having an organization versus an individual as trustee is advantageous, like when you want to minimize individual liability.

Beyond acting as a trustee, trust companies can also perform wealth management, brokerage, and other financial and estate planning services. [4][5]

Types of trusts

For every possible estate or financial situation, there are a range of trusts, all designed for different benefits.

  • Credit shelter trusts: A credit shelter trust is primarily geared towards wealthy couples.. If one spouse is surviving, they are allowed to tap into the trust’s principal for special circumstances (i.e.: medical expenses).[6]
  • Grantor retained annuity trusts: This is a trust for estate planning.. Also known as a GRAT, they incorporate a limited term irrevocable trust where taxes are paid on the funds when established. A tax-free annuity is then paid out to the beneficiary every year.[7]
  • Life insurance trusts: Unusually, this trust is both the owner and the beneficiary of one or many life insurance policies. The trust essentially buys life insurance policies for you. These are owned by the trust itself, meaning any proceeds go the trust and not an individual, thus not subject to tax.[8]
  • Charitable trusts: As the name states, this trust is for using assets to support a charitable foundation, with corresponding tax benefits. Funds from the trust can also support trust beneficiaries (usually the person who created the trust or their family).[9]
  • Living trusts: A living trust is a lot like a will, but one that avoids probate, saves you money, and allows for more privacy than a court document.[10]
  • Revocable and irrevocable trusts: You can guess what these are by the name: a revocable trust can be changed or canceled by the grantor, while an irrevocable trust cannot. The revocable trust allows for a lot of flexibility as situations change.[11][12]

Trust disadvantages

Based on your situation. a trust might not be your best answer. Like any legal entity, its structure can be complex, especially if the need arises to borrow money from the trust. This can necessitate the use of an attorney to help organize and maintain it. Of course, this brings with it additional legal fees. The range of trust options available can be overwhelming, and you don’t want to be stuck with one that doesn’t make sense for your needs (like having an irrevocable trust when you need to borrow money from it).[13]

To learn more about insurance considerations for small and midsize companies check out these small business insurance resources.

 

[1] https://business.laws.com/special-business-forms/business-trust
[2] https://business.laws.com/special-business-forms/business-trust
[3] https://www.kiplinger.com/article/retirement/t021-c032-s014-trusts-101-why-have-a-trust.html
[4] https://smartasset.com/estate-planning/what-is-a-trust-company
[5] https://www.investopedia.com/terms/t/trustcompany.asp
[6] https://www.investopedia.com/terms/c/creditsheltertrust.asp
[7] https://www.investopedia.com/terms/g/grat.asp
[8] https://www.goodfinancialcents.com/what-is-a-life-insurance-trust/
[9] https://www.policygenius.com/retirement/how-to-start-a-charitable-trust/
[10] https://www.legalzoom.com/articles/top-three-benefits-of-a-living-trust
[11] https://www.investopedia.com/terms/r/revocabletrust.asp
[12] https://www.investopedia.com/terms/i/irrevocabletrust.asp
[13] http://www.eldercarelawyer.com/blog/2013/05/the-drawbacks-of-a-trust/

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