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Business Trusts: What Are They? Learn the 3 Types

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What Are Business Trusts?

Business trusts, also known as common law trusts, are legal instruments that give a trustee the authority to manage a beneficiary’s interest in a business. A business trust can be used as the legal entity that runs the business.

There are three types of business trusts, including grantor trusts, simple trusts, and complex trusts. Federal laws surrounding business trusts are also governed at the state level.

Business lawyers help parties draft the legal documents required to formalize the agreement. They will help you, your family, or business associates avoid making legal mistakes, now or in the future.

Here is an article about business trusts .

How Do Business Trusts Work?

Business trusts are formed when the assets, debts, properties, and profits of a business are handed over to a nominated and appointed trustee. The trustee manages these items during the operation of the business rather than for profit. All profits go to beneficiaries, which are people who receive income from all income-producing assets.

In addition to overseeing operations, the trustee must make decisions that are in the best interests of beneficiaries. Typically, business trusts are used for individuals who want to safeguard themselves from creditors, taxes, and lawsuits. Trustees also hold the business title, but beneficiaries receive proof of interest certificates.

Here is another article about how business trusts work .

Business Trusts Example

Examples of business trusts include:

  • Example #1: Delaware and Alaska have specific state laws related to trusts in that there are special tax and financial advantages for beneficiaries.
  • Example #2: A grantor trust allows someone to manage their business finances while providing for heirs.
  • Example #3: Simple trusts are good choices for parent corporations that do not have direct managerial authority over the business trust.
  • Example #4: For parent corporations that do not qualify for simple trusts, they can use complex trusts.
  • Example #5: You want to ensure that you can offer continuity in case you can no longer manage your business.

As you can see, business trusts play important roles in how we can run a business and protect our assets. Consider all of your options with insurance lawyers or trusts lawyers when setting up this type of entity. He or she can execute your documents under trust law in your state and provide legal advice along the way.

There are examples of business trusts in this article , too.

Types Of Business Trusts

There are three types of business trusts. The types of business trusts include a grantor trust, simple trust, and complex trust. Since the terms of each type carry specific legal implications, consider the differences to help you decide which type of instrument is right for you.

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Grantor Trust

Grantor trusts are used for the retention of powers over the business trust. The trust creator is known as a grantor. This individual must pay taxes on the trust’s income.

Under a grantor trust, the grantor has complete control and authority over it, including beneficiary distributions.

Simple Trust

Another type of business trust is a simple trust. These types of trusts require the trustee to distribute earnings on trust assets. However, the principal amount must remain untouched.

In addition to these provisions, the trust is prohibited from making charitable contributions. The income for beneficiaries is generally taxable even if withdrawals are not made.

Complex Trust

Complex trusts are in staunch contrast to a simple trust. For a complex trust to exist, it must periodically perform several activities each year. Under a complex trust, funds can be distributed to charitable organizations and distribute total or partial amounts of the principal to beneficiaries.

The only caveat of a complex trust is that it must maintain some form of income. This income can include interest or allowing the principal balance to remain.

You can read more about business trusts here .

Advantages and Disadvantages of Business Trusts

There are several advantages and disadvantages associated with business trusts. You should carefully evaluate your opportunities and obligations before making a commitment to this type of entity since the disadvantages may not work for every situation. Review the advantages and disadvantages of business trusts before agreeing to the terms and conditions.

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Advantages of Business Trusts

  • Advantage #1: There is a limited liability when appointing a corporate trustee
  • Advantage #2: The business trust structure provides greater privacy than a traditional structure
  • Advantage #3: The distributions to beneficiaries are generally flexible

Disadvantages of Business Trusts

  • Disadvantage #1: Business trusts are expensive to establish and maintain
  • Disadvantage #2: Legal compliance with business trusts is challenging to achieve
  • Disadvantage #3: Business trusts have a limited lifetime with a general cap of 99 years

The advantages and disadvantages of business trust vary widely. You should only form this type of entity if you have a comprehensive understanding of how they work. Regardless of your familiarity, trusts lawyers are prepared to help you navigate the complexities of business trusts.

Business Trusts Taxation

Business trusts are taxed similarly to corporations for intents and purposes related to federal income taxes and other state income tax regulations. Since a business trust is managed by trustees, they have a financial responsibility to act in the best interest of the beneficiaries. Profit and loss generated by the business are equally distributed among them.

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Business Trusts vs. Family Trusts

Family trusts are used when a family’s assets are held to run a family business. They offer tax and financial advantages to individual family members and provide capital and income to benefit the entire family. Family trusts can also be used in conjunction with living trusts or a special needs trust.

Business trusts are set-up for individuals who may or may not be family members. They are also held for the benefit of a business or individual related to the business.

Costs To Set Up Business Trusts

The costs to set-up business trusts will vary according to your situation. Trust lawyers can charge between $250 and $500 an hour and charge a minimum of $1,000 to create a simple business trust. However, the cost of setting up a business trust could be as high as $5,000 or more.

Factors that may increase your costs to set up business trusts include:

  • You have a complicated business structure or several assets
  • Numerous beneficiaries are involved
  • Planning for specific beneficiaries is more complicated than traditional matters
  • Needing other types of trusts to address personal needs
  • Writing other types of contracts to address business needs
  • Requiring additional legal advice for related issues
  • Requesting ongoing business trust management
  • Representing you in hearings or civil court trials

It is also possible to hire trusts lawyers to act as the trustee instead of naming the business or yourself. Trusts lawyers can manage business trusts routinely, but this alternative will significantly increase their costs.

However, it is possible to help you manage the costs of business trusts by working with trusts lawyers online . They can also help you draft the document and update it as you deem necessary. This option can significantly decrease your costs.

Need Trusts Lawyers?

If you need help establishing and setting up a business trust, consider posting your project for free to ContractsCounsel and connect with trusts lawyers in your s

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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