Most adults have some sort of legal document protecting their assets and directing the distribution of those assets in the event of their death. This is standard procedure for many, and a will or a trust ensures that assets and guardianship of children are taken care of in the manner intended.
For most people a will or trust is a very simple and straightforward procedure that can be accomplished with the aid of an attorney or by creating a will online. However, for people with more complicated financial situations there are other things that need to be considered.
For business owners the situation surrounding wills and trusts becomes a little more complicated, in part due to United States tax codes. So which is the better option for business owners? We’ll look at some of the differences between will and trusts, how they affect businesses, and which might be the better choice for you.
The Difference Between a Will and a Trust
Understanding the difference between a will and a trust is key to deciding which is better for you. While they are both legal documents there are some key differences, especially as each document relates to the distribution of assets.
A will is a legal document that you create with the help of an attorney. This document establishes the distribution of property and the guardianship of minor children upon death. A will allows you to pass specific property and monies to the people of your choosing.
Having a will is important because without one, the court decides your beneficiaries and names guardians for your children. However, simply having does not mean that your estate won’t be tied up in probate court after your death.
A trust occurs when the owner or owners of property, with the aid of an attorney, create a legal relationship under which one person or persons hold property for another. While similar to a will, a trust is different in many ways.
Probably the most important difference is that a trust cannot be challenged in probate court, and the trust holder still maintains ownership of the assets and properties and can allocate or change those items at any time. This is typically referred to as a living trust.
Why A Trust Is Better
If you are a business owner or own stake in a business, a trust is arguably the better choice of legal documents for you. While a simple will is fine for many people, a trust is better for many reasons.
Avoid Probate Court
One of the best reasons to choose a trust over a will is the fact that a trust does not go through probate court. Upon establishing a trust the property is transferred from your ownership to that of the trust.
While you still make decisions and have access to and control of all of your assets, the trust legally owns your property. The person or persons that you appoint as trustees will take over after your death and continue to make decisions per your wishes, especially as it relates to the distribution of assets. The courts are rarely involved.
Estate taxes or the lack thereof are a complicated matter and should always be discussed with your accountant or attorney. However, choosing a trust over a will can save your beneficiaries from some forms of taxes on your estate. Currently, the United States government typically only requires estates valued at $10 million or more to be subject to estate taxes. If your combined estate is valued at less than that, a trust is the best choice.
Why Business Owners Should Choose A Trust
Many experts advise early estate planning, especially for business owners. This is mainly due to the fact that trusts are quite flexible and the terms of a trust can be changed at any time while the trust holder is still alive. This means that, as your business changes over time, you can revoke and/or add clauses and beneficiaries at any time which maintains the integrity and flexibility of your business over time. This also can include provisions that direct who holds what capacity within the business and for how long.
Understanding Trust Funds
What is a trust fund? As we have covered, they are legal entities that hold assets on behalf of a third party. This third party could be an individual, business or organization. There are primarily three main parties in a trust fund, including the grantor, beneficiary and trustee. Together, the a trust is properly set up, managed and benefited from.
While it’s always best to consult with a professional regarding all things related to your business, most of those professionals will likely recommend a trust over a will. With the protection of your assets and your beneficiaries in mind, it’s never too early to start planning for the future.