Business Trusts: An Overview
A business trust (also known as a business trust agreement) is a written legal document that separates the ownership of a business from the assets and profits it generates. For example, if you own a pizza restaurant, the business trust agreement will make a distinction between the restaurant as a business and you as an individual owner. While there is no universally accepted definition of a business trust, the business trust may be defined as an agreement where the person or persons operating the business have separate legal duties and responsibilities from those who own the business. Even if the owners and officers are the same, the separation allows for better succession planning.
For starters, a business trust helps you limit your liability to the company itself. If you run a pizza restaurant, for instance, but the business was a sole proprietorship and not a business trust, there is nothing to protect it. In the event of a lawsuit, your personal assets might be subject to a creditor judgment. Arranging your business into a trust might prevent these premature claims from taking the assets of your business and leaving only your investments , retirement accounts, and home. If your business is established as a Nevada business trust, there is even more protection, as Nevada allows many tax advantages and asset protections.
Business trusts also show potential for growth of your investments. We already discussed how establishing a business trust can actually save you money in taxes. Instead of owning company property directly, the trust can own the business real estate, vehicles, equipment, and other investments. The company itself rents the property from the trust, and the profits are taxable at the business level instead of the individual level. This allows the management to seek growth and new projects without tax consequences until the distributions are made.
A business trust can mean easier succession planning. Any partnership, especially one involving family, has the potential for disputes and difficulties at the end. Having a business trust in place allows you to have a continuing business entity that does not require you to have specific individuals in control of it. Further, it avoids mistake and ambiguity on who gets what after your passing.
What Is Required in a Business Trust Agreement?
While each business trust agreement can be unique based on the needs of your business, most include a common set of business trust agreement clauses that you should include in your own document. The following paragraphs provide an overview of the different components of a business trust agreement and explain why such components are so crucial to the business:
Parties. The agreement likely identifies the settlor (the person forming the trust), the trustee, and the beneficiaries. In some cases, the agreement may have multiple trustees or a single trustee with alternatives.
Terms and Conditions. All business trust agreements will include terms and conditions that are specific to the obligations and rights of the trust. Common elements include distributions, distributions plans, voting and administrative powers, and compensation for the services of the trustee and the payment of taxes by the settlor and trustee. The more detailed the terms and conditions in the business trust agreement, the more beneficial it can be to the settlor in terms of liability protection, flexibility, and tax savings.
Trust Property. A trust property clause will describe and identify trust property that is not to be held in a revocable living trust. Such property may include any other type of property and assets that are not to be included in a living trust or a trust that intends to maximize estate tax savings for the grantors. For businesses, this may include stock, capital, and equipment.
Powers of Trustees. This section establishes the level of discretion the trustee has, what restrictions exist, and what powers can be delegated to the trustee.
Different Types of Business Trusts
There are many types of business trusts that you can form. You can even have a revocable business trust. Or an irrevocable business trust. With a revocable business trust, past and future income earned by the trust is taxable to the grantor… or rather it’s taxable to the grantor during the duration of the trust. Irrevocable trusts pay taxes directly to the trust. That is assuming the trust has a taxable events. These include earning interest, paying salaries, and owning a business. Speaking of a business, you don’t have to actually engage in any business to own a trust. A business trust is a trust that you form for either managing a private investment such as a house or business, or having a pooled investment account for multiple investors or shareholders. It’s similar to an LLP and partnerships. You can choose to store real estate in a business trust for its investment purposes.
An irrevocable living trust allows specific instructions to be inside the trust. This is why people tend to form irrevocable skilled nursing trusts. This type of living trust is created so that the value of the assets in the trust do not go to probate. Ownership will pass directly to the trust. That way it is not considered part of the grantor’s estate. Essentially, the creator is able to state what happens to the current assets as opposed to allowing the families to control the estate.
A dynasty trust is a type of trust that allows the grantor to provide an estate for multiple generations. It’s going to allow the grantor or the grantor’s family member to avoid paying estate taxes. The grantor’s wealth might be protected from creditor claims, divorce matters and other types of risks. Of course, there are some bits of criticism because it can be seen as a way of really preventing wealth from being used.
A purpose trust is a trust that is used for a specific purpose. Beneficiaries will not be able to use the assets in the trust, instead they are vested for a specific purpose. Lawyers will set up the trust to replace the lack of charitable foundations if one was not created. The grantor can give the trust a specific duration or it could last indefinitely.
Foreign burial trusts are used by foreign estates in order to provide a burial for its owner. Because the IRS will permit the creation of the trust and make them look like a domestic trust, it’s possible that they’re not subject to foreign estate taxes or any kind of U.S. gift taxes.
How to Write and Draft a Business Trust Agreement
The process of drafting a business trust agreement is generally straightforward but may involve more detailed consideration depending on the nature of the transactions involved and the parties’ intent.
1. Define the purposes
The first step involves establishing what functions the trust will serve. Parties considering such an arrangement often start by attempting to determine their goals for creating the trust. The basic purposes of a business trust are:
A business trust often serves financial and other business functions similar to a corporation. A trust agreement may combine elements of a partnership and an LLC if the trust is intended to control a business.
2. Develop a structure
The next step involves determining how the following parties should be named in the trust:
In addition, the parties should draft the provisions of the agreement to include all of the terms necessary to meet the intended functions of the trust. The agreement could, for example, establish ownership shares in the trust based on the amount contributed by each party. In some cases, the trust may be characterized as a grantor trust for tax purposes. This generally means that the terms of the trust grant the grantor the right to revoke the rights of the other parties or replace the trustee. Thus, a donor could transfer property to the trust and avoid gift taxes while retaining some control over the trust assets absent the intending beneficiaries.
3. Execute the agreement
The parties should draft and sign the agreement to ensure that their intent is clear. A trust agreement does not have to be in writing to be valid, but in practice, businesses always prepare a written agreement for the sake of clarity and documents the intent of the parties.
Parties should consider retaining an estate planning attorney to draft a business trust agreement that satisfies the specific objectives of the parties. A trust should also be funded after the agreement is executed.
Using a Business Trust Agreement Template
Business trust agreements are often designed for use in specific business transactions. The most common types of business trust agreements are those that create a statutory business trust and those that create a business trust in the ordinary sense, without regard to a statutory business trust. An advantage to the creator of a business trust agreement is the ability to create a business trust agreement template that can be used multiple times without the need to start the drafting process from the beginning each time. A business trust agreement template eliminates the need to "reinvent the wheel" with each new business transaction that requires a business trust agreement. This can save hours of drafting time and help ensure that the business trust agreement accurately describes the transaction. Use of a business trust agreement template also ensures that the agreement contains all of the necessary elements and that the form is as complete and accurate as possible. Using an accurate, completed business trust agreement template decreases the likelihood that the agreement will be deemed incomplete or inaccurate. A business trust agreement template does not require the drafter to draft a separate business trust agreement each time one is needed, but instead shortens the length of time required to complete the agreement. Typically, business trust agreement templates are drafted in digital (instead of paper) format and stored on a computer or on the cloud. This allows a drafter to complete the business trust agreement template quickly and to customize the template as needed. An example of a digital business trust agreement template is shown below.
Legal and Regulatory Requirements
When establishing a business through a trust agreement, there are several legal and compliance issues you must be aware of to prevent setbacks in efficient operation. The laws governing trusts can vary from state-to-state, so it’s essential to not only familiarize yourself with the requirements in the state the trust will be based, but in any other states in which the company will operate.
For small business trusts, the most relevant laws include human resources regulations, tax, and any industry-specific regulations. For example, if you are opening a daycare business, you will be subject to licensing requirements to operate . Additionally, if your trust involves foreign investment, there may be additional compliance concerns.
Broadly speaking, under the U.S. Tax Code, trusts do not have many deductions that would lower the amount of taxable income, they can use a special 65-day rule that allows them to treat distributions made in the first 65 days of the following year as having been paid in the current year. An important additional tax consideration — depending on the corporate structure of the trust — are distribution taxes and regulations for S corporations or LLCs.
Picking the Right Template
Once you have made the important decision to establish a business trust, your next step is to locate a business trust agreement template. There are countless templates available for BTA on the internet, on legal form subscription sites, as well as in libraries and law books.
However, not all templates are created equal, and there are several areas to review to determine whether the template is a good choice for your specific business needs. The first concern is the template’s age. Unless the template has been updated in recent years, it may not comply with the most current relevant tax or other laws. You should choose a template that has been recently updated and verified by a competent attorney within the prior six months. It is also prudent to make sure the template you choose specifically states that it is valid in your state, and that it is designed to comply with the state-specific laws for the type of entity (LLC, Partnership, C Corporation, S Corporation, or Partnership) to which you are transferring the business assets. Finally, it’s best to avoid any templates that haven’t been tried out before by someone who could recommend them — the lack of any published reviews can be a red flag.
You should also examine the flexibility of the template. One of the ways in which a BTA can advance your business goals is by allowing you to transfer assets in and out of the entity as your business needs progress. You will need to be able to make allocations quickly and easily as new assets are acquired or existing assets are lost or disposed of. If the template requires complicated appraisals and valuations each time an asset is transferred, it is likely to be more trouble than it’s worth. Your bottom line will benefit from being able to easily add and subtract from your trust.
Invest time now in locating a high-quality template for your business. This will provide you with an asset that will prosper with your business’s growth and success.
Common Errors
Many business owners have ended up getting tangled in complex legal issues and incurring substantial costs due to not having a properly drafted Georgia business trust agreement. While each business’s legal and financial requirements and objectives are unique, there are some common mistakes made by businesses in crafting their Georgia business trust agreement. Your trust attorney can draft a customized agreement to minimize the potential for future disputes. These include:
Not including clearly defined voting powers. Georgia business trusts are similar to Georgia corporations but with some important and subtle differences. However, if the voting powers and authority of the trustee and certificate holders (or beneficial interest holders) is not clearly documented in your Georgia business trust agreement, disputes can arise in the future.
Not providing for the power to amend the agreement. As noted above, a business generally does not remain static but instead changes over time as the entity progresses and as the needs of the owners change. Failing to provide for the power to amend the Georgia business trust agreement within your business trust agreement can be a recipe for disaster down the road.
Not understanding the fiduciary duties of the trustee. Trustees have a fiduciary duty to act in the best interests of the owners of the trust and the trust itself. If a trust has assets that have appreciated over time, special care must be taken to avoid any actions that may devalue or damage those assets (with some limited exceptions). The trust agreement should clearly articulate this duty and the exceptions to the duty.
Failing to properly appoint a trustee. In a Georgia business trust, the Trustee is the one who manages the company. A properly appointed trustee that understands and carries out his or her duty in accordance with the trust agreement should help ensure the trust runs smoothly. On the other hand, if a trustee is not properly appointed, is not qualified to perform the duties of a trustee or fails to carry out his or her duties, the trust can suffer.
Not seeking advice about Georgia laws on business trusts. Laws and regulations vary from state to state, and these differences can affect your rights and obligations. Your attorney is familiar not only with Georgia business trust law but also with the ever-changing estate, divorce, creditor and tax laws that may have a ripple effect on your Georgia business trust.
Frequently Asked Questions
What are the essential elements of a business trust agreement?
A business trust agreement should detail the trust’s purpose, define its assets, give powers to the trustee(s), outline the duration of the trust, and describe the process for distributing assets. It should also detail the rights and responsibilities of the people running the trust or the company it holds.
How do you customize a business trust agreement template for your own use?
To customize a template, carefully review the standard template to understand the areas requiring adaptation. Identify specific details about your business that need incorporating, such as names, addresses, purpose of the trust , and distribution processes. Be sure to edit any sections that appear inapplicable to your specific needs.
Are there any legal requirements for a business trust agreement?
While the law doesn’t require a business trust agreement, having one can protect the assets of the trust company. Nevertheless, the terms of this agreement must conform to all local, state, and federal laws.
How do I know if my business trust agreement is legally binding?
To ensure your business trust agreement is legally binding, it should be drafted or at least reviewed by a knowledgeable business attorney. The business trust agreement must also be signed, either with a "wet-ink" signature or electronically, depending on your region’s acceptance of e-signatures in commercial agreements. Verify if there are witness or notary requirements in your jurisdiction.