Using a trust to protect your business

Last updated on 12th December, 2017 at 04:29 pm

You’ve heard about family trusts used to protect personal assets, especially those of minor children. But did you know that a trust can also be used to protect business assets?

Many people don’t realise that they can protect business assets by holding them in a trust-owned company, which in turn owns the business. Trusts provide protection and advantages that other legal entities do not. They therefore provide a solution for many sticky estate-planning problems associated with owning a business.  

Benefits of using a trust-owned company for business purposes

For protection:

The assets of a trust are usually protected if you are being held personally liable for anything. Your creditors cannot lay claim to the trust assets, including the shares held by the trust in the company owing the business. This is especially important when you are in business where there is a possibility of sequestration of your estate should something go wrong.

For preservation of wealth:

People who have amassed wealth in their lifetime, or who have inherited wealth, want it to benefit succeeding generations. A trust is the most effective vehicle for that purpose as it allows succeeding generations to participate in and benefit from the wealth created in one generation.

Continuity:

As business owners get more involved in their business, their personal affairs can suffer from benign neglect. This is mainly because many business owners simply do not have the time to attend to strategic personal planning, and because families are often focused on their own goals and successes. Rather than waiting until you are no longer around and leaving your family or business partner(s) to sort things out, you can set up a trust to ensure that your personal and business affairs will continue with a minimum of disruption.  

What should you consider?

While trusts can provide solutions for many situations, they are not necessarily the solution to all problems. It’s vital to understand the workings of a trust before you set up one. Firstly, a trust is an agreement between the owner of the assets and the trustees of the trust, who will manage the assets with due diligence for the benefit of the beneficiaries of the trust. That means you lose legal control over the assets that you sell to the trust. There are also tax implications, especially those associated with the sale of immovable property.

To ensure your peace of mind with the creation and management of your protection structure, you should consider working with a qualified adviser who understands both the legal and financial implications of trusts and companies. Also, it is important to avoid a sham trust, and you need to understand the legal and compliance duties involved. There has to be a real intention for the founder of the trust to pass over control of the assets to the trustees of the trust. If this is not done, the courts may ignore the existence of the trust and deem the assets as part of the founder’s estate. This can have dire consequences in the event of sequestration and/or divorce proceedings.