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Is a business trust right for you?

On Behalf of | Sep 27, 2023 | Business Law |

A business trust, also known as a common law trust, is a way of holding a stakeholder’s rights. Like an individual trust, you appoint a trustee to manage the business trust. In New York, you can name more than one beneficiary. Additionally, the business can be owned by a single trust or multiple trusts.

Types of business trusts

The three main types of business trusts are simple, complex and grantor. A simple business trust distributes profits to the beneficiaries, and it’s unable to touch the principal assets. Beneficiaries would need to pay taxes on the income that they receive from the trust. The IRS has specific requirements and limitations for trusts to qualify as simple. Charitable donations and income accumulation are prohibited, but trustees can take certain tax deductions.

A complex trust can generate income and donate to charitable causes. To qualify as a complex trust, it must generate revenue and not have a condition that requires all payments to be distributed to beneficiaries. The IRS also permits certain tax deductions for complex trusts.

In a grantor trust, the grantor retains the ownership of the assets in the trust. Since they have ownership, the grantor must pay the trust’s income taxes.

Pros vs. cons of business trusts

A business trust, like an LLC or a corporation business formation, reduces the liability of beneficiaries like an LLC. It helps maintain your privacy, and setting the distribution terms is easy. There are clear rules to follow in the IRS tax code. However, most business trusts can’t last more than 99 years, so you may consider another estate planning option if you’re thinking farther ahead. You might also want to consider the cost of maintaining a business trust. It could be more expensive than it’s worth.

Business trusts are a viable option for business owners, providing liability protection, tax benefits, and LLCs and corporations.

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