Once you have your business up and running, most of your attention is probably on its daily management and planning for future growth. You most likely aren’t thinking about what might happen to your business when you die.
However, as a business owner, it’s important to think about what should happen to your business in the event of your death. Without a written, legal plan in place, your heirs could face delays — as well as significant expenses — in executing your wishes. Establishing a living trust as part of your estate plan can eliminate some of those risks, while also protecting your business’s assets after your death.
Living Trusts Defined
Entrepreneurs have several options for protecting their business assets while they are still alive. Corporate structures such as limited liability corporations and S corporations limit a business owner’s personal liability for corporate debts. If you’re the sole owner of the business, though, those protections don’t do anything to ensure that your heirs or beneficiaries receive the full value of the business.
Living trusts are another form of asset protection, one designed to protect your business after your death. When you put your business into a trust, you become the grantor, and designate the management of your assets (in this case, your business) to a trustee for the benefit of someone else. Because the trust is established while you are still alive, it’s called a living trust; you can also establish a testamentary trust as part of your will to take effect after your death.
With a living trust, though, you can designate yourself as the trustee to manage the business’s assets while you are still alive. You would need to designate a secondary trustee to take over after your death— and that person can also take over the management of your assets in the event you become unable or unwilling to do so yourself.
Why You Need a Living Trust
Living trusts have largely been the domain of the very wealthy, as they tend to have the most at stake when it comes to distributing assets to their heirs.
They are also important for business owners, though. Unless you have joint ownership with someone else, there’s a good chance that your assets could be significantly reduced and your business harmed. There are several reasons for this:
- Debt collection. If the business is not in a trust, its assets can be used to pay the owner’s personal debts after death. If you do not have enough personal assets to pay your creditors after your death your creditors can and will seek payment via your business. This could reduce operating capital and even put you out of business.
- Probate. When you die, an estate that isn’t in a trust will go into probate to distribute the assets to your heirs as determined by your will — or at the court’s discretion if you do not have a will. Probate can be expensive and time-consuming, and your heirs may have to pay taxes on the assets they receive.
- Lack of a succession plan. If you were to die tomorrow what would happen to your business? Do you have a plan in place for someone else to take the reins? Do all of the key players know how to proceed? A living trust is a key part of a succession plan, as it not only ensures that the business will have the financial resources necessary to stay in operation, but there’s a clear determination of who will be “in charge” and less of a chance of disruptions.
Living Trust Considerations
A living trust is not a replacement for a last will and testament. Only certain assets will be managed by the trust, and anything that’s not in the trust could potentially go into probate unless it’s jointly held or gifted to the beneficiary before your death.
You will also need to determine whether your trust is revocable or irrevocable. A revocable trust can be altered or dissolved by the grantor at any time, while an irrevocable trust cannot be changed. Irrevocable trusts offer more in terms of asset protection, since you can’t be sued for those assets since technically, you don’t still own them, but it does raise potential complications in terms of beneficiaries. In fact, all trusts have some potential complications in terms of managing and accounting for the assets in trust, and managing beneficiaries and trustees, which can increase costs and paperwork.
Despite some potential pitfalls, living trusts are a good way for entrepreneurs to protect their businesses after death and ensure their assets are distributed appropriately without giving up control while they are still alive. Talk with an attorney to review your individual situation, and find the best option for your business.