Find out how a trust can benefit you and your future in the long run
When people hear of trust, they often think of its application within a family setting. However, what some people don’t know is that there is such a thing as a trust for businesses. If you haven’t known there are trusts for business, perhaps this article can explain what it is.
A business trust is, of course, for a business. It usually covers the general areas of how the income is split, if one owner dies then what happens to their portion of the company, and many more.
How does a business trust function?
A business trust functions almost similar to a personal/family trust. The similarity is mostly that you will be allocating which business property to who and who gets how much money in the business. It works similarly to a family/personal trust – except on a business level.
So whatever assets and properties a business has will be divided and allocated to the named beneficiaries.
What goes into a business trust?
Now that you know what a business trust is and how it works, here are some things that go into a business trust. Generally, most of the contents are similar to what a personal trust has, except with a few extra clauses and items.
Distribution and splitting of assets and properties
This is the most common item in a business trust. Basically, when you have passed away, your properties and every asset will be distributed to your beneficiaries whom you have named. It works similarly to how a personal trust functions and is a very self-explanatory part.
Asset protection
This is where a very solid line is drawn between your personal assets and business assets. Sometimes, if something went wrong, it can go very wrong on so many levels.
For example, if your business owes money, the creditors will ask you to sell your assets to pay off debts. They didn’t mention which assets, as in personal or business assets. So if you do not have a clear cut business asset in place, the creditors or debt collectors will start selling your personal assets to pay off the outstanding debts incurred by your business.
You do not want this to happen because one thing will lead to another. It’s good to have a business trust in place and have it updated periodically.
Income splitting and reduced taxes
Income splitting allows the named trustee to distribute the business profits to the named beneficiaries at a different level. The reason why business trusts have income splitting is so that the lower-income earner beneficiaries can have a bigger chunk of profits.
Besides, profit distributions may increase any of the beneficiaries’ income into a higher tax bracket. The trust can make a distribution to the corporate trustee. The corporate trustee will ensure that the beneficiary will only be subjected to a company tax rate of a limited percentage.
Why do you need a business trust?
I think we all know quite clearly now why you will need a business trust. Having a business trust allows you to divide your personal assets from your business assets distinctively. In the event where you have passed away but still owe money, things tend to get very messy, for example.
Having said that, by having a business asset in place instead of having none is better than having nothing at all. If you do not have a business trust, the creditors and debtors will come for your personal assets and income, which can cause a lot of problems.
Bottom Line
Now you know why it’s good to have a business trust in place. It can benefit you in the long run and provide some much-needed directions for your business when you have passed away.
If you want to learn more on how to use trust to protect your business, feel free to reach us out.
