Business Succession Planning with Trusts

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

Business Succession Planning with TrustsBusiness Succession Planning with Trusts

Understanding how a trust can help with your business succession is key to assuring your financial stability, both in planned transitions and unplanned transitions of your business.

You may be looking ahead to retirement and wondering how best to transition out of your business and smoothly turn it over to a successor or want to ensure that at your death your legacy continues.

Start anticipating the future of your business. Here is all the information you need to start planning your business succession with trusts.

What is a Trust

Before understanding how business succession planning with Trusts works, you have to know what a trust is.

A trust is a fiduciary arrangement that allows a third party, called a trust, to hold assets on behalf of one or more beneficiaries.

The terms of a trust decide exactly when and how the assets that have been placed into a trust, which is referred to as “funding the trust”, will pass to the named beneficiary or beneficiaries of the trust.

Parts of the trust:

A trust generally consists of the following:

  • A grantor: The one to create the trust.
  • A trustee, acts as the legal owner of the assets that are placed into the trust. The trustee has other important duties, such as filing taxes for the trust, and distributing the assets of the trust in accordance with the terms of the trust.  You can have more than one person act as trustee, choose your trustee wisely
  • One or more beneficiaries: The person or group of people that the trust is meant to benefit. The beneficiary of the trust does not have to be a person, it can be a business or even a charitable organization.
  • Trust assets: Are what is used to fund the trust, whether it be cash or real estate or anything else of value.
  • Purpose: The intent behind creating it, whether it be tax avoidance, creditor protection, asset management or another purpose.

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

Why Do You Need a Trust For Y Business

Without a trust, your business could come to a screeching halt in your absence. You’ve likely poured blood, sweat and tears and a lot of money into creating your successful business. The last thing that you want is for it to fail in your absence.

Let’s look at this scenario:

If you were to pass away from a catastrophic illness, such as cancer, or after a lengthy battle  in the hospital with COVID, money from your business, meaning both liquid assets (such as cash in the business checking account) and non-liquid assets (such as real estate) owned by the business could have to be used to pay your outstanding medical bills. 

Properly protecting business assets in a trust can keep your business from having to satisfy your personal debts as a properly established trust can protect your business assets from creditors.

A trust is an important part of a business succession plan, and its importance should not be overlooked. Trusts have played an important part of business succession planning for years. A trust can provide tax avoidance, protection from creditors, probate avoidance and management of business assets.

Some business owners wish to avoid probate- the process of probate is public record. By establishing a business trust, you can protect your business’ privacy, which could be crucial in some industries.

Related Link: Cannabis Business Plan

For a quick assessment of your needs – let’s talk to discuss how Trusts can help your business.

What is a business succession plan

Now that you understand how a trust can protect your business, let’s talk about how a trust can help with your business succession plan.

A business succession plan is just that- A plan, preferably, a written one, that lays out a plan for your business to continue after you retire, or after you sell it to a new owner or business partner, or even after you pass away.


Why do you need a Business Succession Planning with Trusts-3business succession plan? 

A well-thought business succession plan can assist in a smooth transition from one business owner to another. A comprehensive business succession plan can help with that smooth transition by minimizing taxes, transition costs and interruptions to the business which could easily lead to lost revenue.

About 40% of businesses end up being run by 2nd generation owners. A business succession plan that includes a trust can help the business stay successful throughout the second, third, fourth or more, generation of owners.

Types of Trusts

  • Revocable trust or
  • Irrevocable trust.

A revocable trust will allow you, as grantor, to control the assets that are used to fund the trust. Remember, you have to place some sort of asset into the trust in order to fund the trust. Whether that is deeding a piece of real estate from your name into the trust, depositing cash or investments into an account in the name of the Trust, or even some other type of asset, like a vehicle, you must fund the trust.

A revocable trust keeps these assets in your control, and you will be able to “dissolve” or end the trust at any time that you desire to. Once you die, a revocable trust will generally become irrevocable. Assets in a revocable trust do avoid probate however, they generally do not avoid taxes nor do they generally provide protection from creditors as these assets are still in your control.

An irrevocable trust is one that once it is established any assets put into the trust will be out of your control and you will not be able to change the terms or dissolve the trust at will.

Assets that have funded an irrevocable trust also avoid probate just as assets used to fund a revocable trust, but by putting your business assets into an irrevocable trust, the trust will be able to avoid taxes at your death, and they will be protected from claims by creditors, creating a better outlook for your business.

There are many different types of trusts. Some are better for business succession planning than others. You should consult an attorney before deciding what type of trust is right for your situation. Every situation is unique. However, common types of trusts used in business succession planning include:

  • Irrevocable life insurance trust (ILIT)
  • Grantor Retained Annuity Trusts
  • If your business is set up as an S Corp, The Qualified Subchapter S Trust, or “QSST”
  • Electing Small Business Trust (ESBT).

An ILIT keeps the proceeds from the decedent’s taxable estate while providing liquid assets to the beneficiary of the trust. This cash infusion could be used to continue day to day operations of the business during the transition period from decedent to the new owner.

A Grantor Retained Annuity Trust is an irrevocable trust that will transfer your business assets upon your death, and this transfer would not be subject to estate taxes. During your lifetime, the assets that have been used to fund this trust will pay you an annuity income. This effectively passes on rapidly growing business assets to your children. The grantor retains control of these assets during the term of the annuity, which is usually 2-5 years. However, if you die during the annuity terms ends, because you retained control over them, the assets are considered part of your estate and subject to taxation.

A Qualified Subchapter S Trust, or QSST, and is a way to pass ownership of S Corporation Stock. This can allow for the owner of a business to control the business even after death through the directions left for the Trustee. There are several specific requirements in order to establish a QSST. Among those are:

  • there must only be one beneficiary of this type of trust,
  • the beneficiary must receive all of the trust income annually
  •  any principal distributed must be distributed to the beneficiary.
  •  A grantor of a QSST should appoint a non-beneficiary trustee for the purposes of making trust distributions.

And the other type of trust that can hold S corporation stock is the Electing Small Business Trust (EBST). An EBST is more flexible than a QSST in that it can have more than one beneficiary, and the trustee has discretion in making distributions.  There are differing tax treatments for QSST and EBST, so consult an attorney when establishing these trusts.

We hope this Business Succession Planning with Trusts post has helped you to see a few of the varying ways that as a business owner you need a trust as part of your business succession plan. Here at Collateral Base we have an estate planning attorney that is ready to help you plan for the successful transition of your business.


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