What is a Trust agreement and how can it benefit your business?
(1) A trust is a legal agreement that entitles a third party, or trustee, to hold assets on behalf of other parties, or beneficiaries. Small businesses can use corporate trust agreements to manage funds delegated for specific reasons and manage the processes associated with those funds.
(2) Every corporate trust agreement has three main parties: a grantor, trustee and beneficiary. A grantor creates the trust, a trustee manages the trust and a beneficiary is the party the trust is created to benefit. While, in theory, all three of these entities can be the same person or corporation, for legal purposes, they are considered separate entities. A particular benefit of using a corporate trust is that the trustee can be an outside party who doesn't stand to gain from the assets. The trustee, which can be one or more entities, an individual or a corporation, has the responsibility to ensure the trust agreement is not abused.
(3) For example, Corporate trust agreements are used to manage assets and wealth, but this can be applied in different ways. For family-owned businesses, a trust is a way of distributing assets and keeping those assets in the family after the grantor leaves or dies. Charitable trusts are another form of the corporate trust agreement that benefits a charity. This type of corporate trust can be used for an ongoing business, wherein the business owner benefits from the trust for a period of time and then the remainder goes to charity. Some business owners use the tax advantages of charitable lead trusts to dissolve or exit businesses in a way that limits financial risk because this type of trust is tax-exempt
A quick review of aspects of a trust:
- What is a Trust?
- A Trust is a fiduciary relationship where the assets are held by the Trustee for the benefit of another(the beneficiaries).
- What are the benefits of a Trust?
- A Trust enables a business to continue to run in their absence, sets out a clear succession plan in the event the trustor(creator) or the Trustee(manager of the trust fund) are unable to perform their duties
- Assets are privately protected
- Business trust assets are protected from your personal liability
- What are the drawbacks of a Trust?
- A Trust is not a separate legal entity, therefore the trustee is legally liable for the debts fo the trusts and may use its assets to meet those debts
- Can be expensive and complex to establish
- Difficult to dissolve once established particularly where children are involved
- Does not distribute losses, only profits
- A trustee must apply for a tax file number (TFN) and lodge an annual trust return. The trust is not liable to pay tax. Instead tax is assessed to the trustee or the beneficiaries that are entitled to receive the trust net income.