As a business owner, you’re likely concerned with not only building your business value but protecting that value as well.
Protecting that value means establishing the right trusts for you and your business.
Here at Consolidated Planning, our decades-long experience in helping business owners thrive makes us well equipped to find the right solutions for your business goals.
In this article, we’ll help you understand the types of trusts, how each trust provides a benefit to you, and how and when to use the trusts that make the most sense for your unique situation.
What Is A Trust And How Does It Benefit Business Owners?
A trust is an arrangement between two parties – the grantor who transfers their ownership and a trustee who manages these assets within the trust(s).
The idea of a trust can be traced back to Roman times for mostly the purpose for the holding of land for the benefit of another.
At present, trusts are often used for a variety of reasons and are most often set up, not at death, but during your lifetime as a business owner. And while a Will it also put into motion during your lifetime, trusts are often funded during your lifetime (and at death), while a Will is only funded at death.
Business owners are the perfect candidate to utilize trusts. Yes, you. Think about your balance sheet – it’s likely larger, with more illiquid assets which creates far more risk. Risk that needs proper protection. For these reasons a Will is not sufficient enough. Trusts give you the protection you want and need, including:
- Privacy
- Certainty of how assets will be controlled, utilized, and spent, and
- Taxes
- Creditor Protection
- Bankruptcy Protection
Because of these reasons, there are three trusts you may want to consider when it comes to estate planning for your livelihood.
3 Types Of Trusts For Business Owners
While there are many kinds of trusts you can establish for your business and personal affairs, these three provide a strong mix of protection for your assets.
#1 Revocable Living Trust
Perhaps the most basic type of trust is the revocable living trust. And just like the name implies, this trust is revocable – able to be changed or revoked at any given time until death. You are the grantor of the trust, likely even the lifetime beneficiary of the trust and your testamentary trust is likely your death beneficiary.
While a revocable living trust reads like a Will, there is no reading or public declaration of this trust. This can be good or bad, depending. With no public declaration of this trust, there is no opportunity for the estate to be challenged, creating tremendous privacy for your assets and beneficiaries. This privacy makes this trust incredibly hard to pierce.
The revocable living trust ensures that what you set in motion stays in motion.
This trust creates a moat, if you will, around your assets even while you’re living. With that being said, the bulk of your assets can and should pass through this trust, not your Will.
Now, we know you want to save on taxes but a Revocable Living Trusts don’t save taxes or shield you from liability. However, what this trust does is create privacy. Since a Will is a public document in probate court it’s extremely ‘public’ in nature. Moreover, a Revocable Living Trust provides certainty over the disposition of your assets.
The more assets you accumulate, including your business stock, the more privacy and certainty concerns become relevant when it comes to your desired dispositions at death.
#2 Credit Shelter Trust
Commonly, a Credit Shelter Trust, also known as a Family Trust, utilizes the applicable federal unified credit amount at one’s death for the first to die.
The government gives each and every person an amount in your estate that you won’t pay taxes on. This amount is technically a credit, in the form of an exemption. This unified credit effectively allows for flexibility in transferring wealth, whether the person prefers to give during their lifetime, leave it as an inheritance, or a combination of both.
With a Credit Shelter Trust, your estate of X will carve out enough of those assets to ensure the credit amount is utilized. Whatever is put in this trust will be free and clear of transfer taxes.
Now, unlike a Revocable Living Trust, this trust is actually a testamentary trust formed at death. Your Will or Revocable Living Trust (we hope) would give a directive to create this trust on your behalf and from there, the amount equal to the applicable unified credit amount.
As of now, this credit amount is $13.61 million per individual. However, along with many other tax laws, this exemption is expected to sunset after 2025. If this does in fact sunset, the credit amount will be lower. Regardless of the amount, the unified credit effectively shields this amount from taxation.
A Credit Shelter Trust goes to work for you and your business.
#3 Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust (GRAT), also known as an Intentionally Defective Grantor Trusts (IDGT) can be designed in many different ways. Regardless of its set up, this trust allows you to transfer assets to beneficiaries for the purpose of moving assets OUTSIDE or your taxable estate.
This is for those assets that you really don’t need anymore and you expect high-growth from in the future. Now, while privacy and control is important here, you are establishing this trust for tax savings and general protection. General protection for your assets may include:
- Taxes (yes, worth mentioning again)
- Lawsuits
- Bankruptcy
- Potential divorces within the family
Now with these assets, you still have some levers of control over cash flow from the asset, but you don’t outright control the asset. Your appointed trustee, which might be a spouse, family member, or trusted friend is the one who controls these assets. This ‘trustee’ has the responsibility to serve the needs of the beneficiary of this trust
Your 1M in assets, for example, won’t be outright owned by you any longer. It lives on the trusts’ balance sheet, out of your taxable estate, out of harm’s way, and grows compounding outside your estate as well. As the grantor of this trust, it only makes sense that you want to safeguard these assets for your beneficiary.
Moreover, while your spouse might be the lifetime beneficiary, other non-spousal members are generally the ultimate beneficiaries of this trust.
This Trust Covers Everything But Is Irrevocable
A GRAT is ideal for those business owners who have high-growth assets such as business and/or real estate holdings and want it all – tax savings and general protection for these assets today and in the future. However, this trust is irrevocable and must be very carefully stepped into. Once you transfer these assets into the GRAT, you cannot change or revoke the trust as the assets are no longer on your balance sheet and therefore not part of your estate.
Keeping your wealth is just as important as gaining it in the first place. And trusts, especially a GRAT, helps you do just that.
When Should Business Owners Start Using Trusts For Their Business?
Yesterday.
If you haven’t established a trust for your business yet, it’s not too late (but, it’s also never too early). The best time to begin utilizing these trusts is anytime before you sell your business. More specifically, before you even have an offer to buy your business.
There is a direct correlation between your business value and established trusts when it comes to leveraging growth and reducing estate tax liabilities. Establishing trusts is another reason it’s important to have an accurate business valuation done and done regularly.
A trust allows you to transfer ownership of your business before the business appreciates significantly in value. With your assets in a trust early on, future appreciation occurs outside of your estate, helping to reduce estate taxes when passed to said beneficiaries.
Speaking of estate taxes, for your high-value business, placing assets into an irrevocable trust, for example, helps reduce the size of that taxable estate. Since estate taxes can be substantial with a high-value business, a trust can provide some liquidity.
Just like any strategic planning when it comes to your business – the sooner, the better, and trusts are no different.
Protect Your Business With The Right Trusts For You
As a business owner, trusts add a level of protection and a clear path for transferring your wealth. Between the Revocable Living Trust, Credit Shelter Trust, and GRAT, you can:
- Safeguard your assets
- Manage your succession, and in some cases,
- Mitigate taxes
What’s even better? For some business owners, additional types of LLC’s and trusts can further enhance the quality of discounts, control, and tax savings.
To understand your options when it comes to maximizing trusts to benefit your business and its legacy, talk with an experienced business planning professional at Consolidated Planning.
7044352.1
Exp. 9/2026
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Consolidated Planning and Andy Brincefield only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
