By Rieva Lesonsky
As a small business owner you, of course, want to protect your personal assets and property and also to share your good fortune with family or other beneficiaries. A trust is one way to do this and is also a way, during one’s lifetime, to manage taxable assets and save precious working capital.
A trust is a separate tax entity from the person setting up the trust and therefore reports its own income and pays its own taxes separate from the creator. Don’t get carried away: If you’re looking to hide income in a trust, the IRS will target your trust as an abusive trust and come after you. However, an honest trust is a good way for business owners to control how their assets will be managed after their death and to make sure their children and their charities are provided for.
A trust has four major components:
- Someone creates the trust.
- Someone agrees to be the recipient of the trust.
- Money or property (the principal of the trust) is held by the recipient.
- And finally, there must be some benefit of the trust.
There are many different types of trusts, although the main distinction is whether the trust is applied during or after your lifetime. If it’s during your lifetime, the trust is called a “living trust.” If the trust does not take effect until after your death and is part of your will, it’s called a “testamentary trust.” With a living trust, the assets are controlled by you until your death and then distributed to your beneficiary upon your death. With a testamentary trust, the trust is tied to the will and can help reduce estate taxes for the beneficiary. A living trust avoids probate (the court-directed process of determining assets), where a testamentary trust does not.
Here are some other trust-related terms you may run across:
– Asset protection trusts—These are trusts set up to protect assets from creditors.
– Revocable or irrevocable trusts—Simply, if the person setting up the trust deems the trust irrevocable, the trust cannot be changed in any way or form. If it’s a revocable trust, the grantor can change the terms of the trust. Obviously, these are only relevant to living trusts.
– Credit shelter trusts—Many married couples with large estates set up credit shelter trusts to protect the surviving spouse from huge federal estate taxes upon the death of one spouse. The surviving spouse can still benefit from the income of the trust, and the assets are transferred to the beneficiaries of the trust, which are usually the children. For this reason, this type of trust is also called a family trust.
Check with your accountant to decide the best kind of trust to set up for your needs.
Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at email@example.com, follow her on Google+ and Twitter.com/Rieva and visit her website, SmallBizDaily.com, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.