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.
Revocable Living Trust
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 there’s no protection
from creditors, divorce, or estate taxes. If you are building a business that
likely won’t have a high future value, is merely a cash machine for you, and
won’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.
Irrevocable Trusts
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.
Risks Of Owning A Business In
Your Name: Liability and 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 name—and that’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 government’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 business’ 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.
Enlist Our Help To Protect Your
Business
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 Lawyer™. 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.