If youâ€™ve decided to incorporate your business or review the type of entity you already have in place, itâ€™s essential to not only choose the right entity, but also decide who (or what) should own that entity.
The answer to who (or what) should own your business entity depends on the risks you face, such as incapacity, divorce, bankruptcy, and death. Given that death is a certainty, at the very least, your business interests should be owned in a revocable living trust. This is true regardless of whether your business is a limited liability company (LLC), corporation, or partnership.
A revocable living trust holds your business assets, so upon your incapacity or death, your successor trustee can step in, and without any need for court involvement, he or she can handle your business affairs. Because the trust is revocable, there is no separate tax ID, no tax consequences, and nothing to do other than have the trust agreement created and your business ownership re-assigned to the trust. And as long as you are working with a lawyer who can ensure you make the right decisions and get it drafted properly, living trusts are easy to set up.
However, one downside of a living trust is that thereâ€™s no protection from creditors, divorce, or estate taxes. If you are building a business that likely wonâ€™t have a high future value, is merely a cash machine for you, and wonâ€™t earn you millions of dollars one day, then owning your business in a revocable living trust may be just fine.
But if you are building a business that will one day be worth millions, you should consider not owning the business in your name via a living trust. Instead, you may want to look into holding the business in an irrevocable trust.
With an irrevocable trust, the business is owned by the trust, not you. Since you canâ€™t lose what you donâ€™t own, creditors and lawsuits cannot reach your company and its assets if itâ€™s inside such a trust. Furthermore, if you anticipate significantly growing the businessâ€™ value, an irrevocable trust can also provide estate tax protection.
An irrevocable trust has its own tax ID number, and the trust is a separate taxpayer from you. You can then establish the trustee of the trust as the owner of the business, and while you may be the investment trustee, there's another trustee involved: an independent trustee, who is the trustee for purposes of distributions and who creates a layer of asset protection and also protection from estate taxes.
If you own your business in your own name and you face creditors, lawsuits, divorce, or bankruptcy, your business could be taken to satisfy a judgment against you. Protecting your business from liability is one reason you may not want to own your business in your nameâ€”and thatâ€™s true for a business of any value. But as mentioned earlier, if you are building a big company that will be worth a lot of money one day, you may want to consider owning it inside an irrevocable trust, rather than in your name.
Another reason to own your business in an irrevocable trust instead of your name is that upon death, you will likely want your business to be outside your estate for estate tax purposes. In 2023, the estate tax exemption is $12.92 million per individual. However, all estates over $12.92 million pay an estate tax of 40%. This requirement means that if you have a high-value business, it will surpass this threshold, forcing your loved ones to pay a huge tax bill to inherit your business. Furthermore, the estate tax rate can fluctuate depending on what administration is in office and the federal governmentâ€™s needs. Depending on where you live, your state may have a much lower estate tax exemption.
By setting up your business inside an irrevocable trust, your businessâ€™ value grows outside your estate for estate tax purposes. To avoid having your loved ones pay exorbitant taxes upon your death, consider owning your business inside an irrevocable trust.
If you already own your business in your name, it may not be too late to move the business into an irrevocable trust structure. But youâ€™ll definitely want to consult with a trusted family business lawyer like us, who understands these structures, so you can get things set up properly. Youâ€™ll want to do this as soon as possible, since incapacity and death can strike at any time.
If you have not yet started your business, but you are confident the business will be worth millions one day, contact us before you incorporate. We can set up an irrevocable trust to provide your business with the most airtight asset- and estate-tax protection you can get through legal planning. And if you simply need to set up a revocable living trust for your business, we can help with that, too. Contact us today to get started.
This article is a service of Ganvir Law, Personal Family Lawyerâ„˘. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a Business Strategy Session for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.