As an entrepreneur, it will be essential to discuss the various legal structures with a trust lawyer to help shape the success of a business. One particular legal structure that is often overlooked is the prospect of developing a trust. Our team from Kaplan Law Practice, LLC will share that for business owners and entrepreneurs, having a comprehensive understanding of trust Law can offer substantial advantages for a person’s wealth and business.
Understanding Trust Law
Trust Law is the legal framework that allows a party, the trustee, to hold assets on behalf of another party, the beneficiaries. Trusts are established through trust deeds, which provide a robust mechanism for controlling the distribution and management of assets while also providing potential tax benefits and protection of assets from creditors. Business owners and entrepreneurs often use two types of trusts:
- Discretionary Trusts
- Unit Trusts
Discretionary trusts, commonly referred to as family trusts, are when the trustee has discretion over how the income and capital of a trust are distributed. Beneficiaries do not have a fixed interest but are eligible to receive a share of the trust at the trustee’s discretion. Discretionary trusts are popular for their flexibility, asset protection, and potential tax planning benefits.
A unit trust is more akin to a company structure where beneficiaries (unit holders) have a fixed interest in the trust, similar to shareholders in a company. Unit trusts are often used for joint ventures and property developments due to their predictable distribution of income and capital.
As a business owner, a trust can provide asset protection, as the assets held by a trust are generally not accessible to the personal creditors of a business owner or beneficiary. For example, personal assets secured in the trust remain protected if the business goes into debt or bankruptcy.
Choosing a Trust
Trusts are available as a tool not only to protect and adequately distribute assets; they can also act as an effective tax planning tool. Moreover, trusts provide an effective tax planning tool. The trustee can distribute income in the most tax-efficient way among the beneficiaries with different tax rates. For instance, in a discretionary trust, the trustee can distribute more income to lower-income beneficiaries, thus reducing the overall tax burden.
An Important Note
Trusts can come with both complexities and limitations, making help from a lawyer critical. Setting up and administering a trust requires professional advice and involves ongoing costs. Also, trusts have a limited lifespan in many jurisdictions, commonly 80-125 years. However, while these complexities exist, trusts are a powerful tool for entrepreneurs for asset protection and tax planning. Understanding trust law allows business owners to structure their business in a way that safeguards their assets and optimizes their tax position.
For entrepreneurs, considering a trust to protect assets for beneficiaries is a vital tool for the future. While it may initially seem complicated, the strategic advantages provided by this framework make it worth understanding and leveraging. When setting up a trust, always consult with legal and tax professionals, and ensure it aligns with business goals and financial circumstances. Trust law is not a one-size-fits-all solution, but it can provide significant benefits when used correctly and strategically.