If you own a business, it’s always a good idea to have a solid succession plan in place.

This protects your interests in the business alongside those of your family, clients, partners and supply chain.

There are a number of plans you might consider, but one that is often overlooked is the option to put your business in a trust.

This is a way of protecting business assets when you (the settlor) want to pass your business on to a particular person (the beneficiary).

What is a trust?

A trust is a legal arrangement (rather than an entity such as an incorporated business) wherein part or all of your business is legally owned and managed by a trustee on behalf of a beneficiary.

The trustee has the right of access to all assets within the trust and may use, sell, access or otherwise administer them – provided they act within the best interests of the business and the beneficiaries and do not use the assets for intended personal gain.

In some cases, you might be both the settlor and the trustee and may take on a beneficiary role as well.

Trusts can be used to protect business assets, support ongoing business management and reduce tax when you decide to pass your business on – which is why they are used by many types of businesses.

For instance, a family-owned business might use a trust to equitably divide interests among family members while keeping the business operational under experienced management.

Setting up a trust

You should take your time when putting your business into a trust as it can take time and become complex.

You will first need to consider the type of business that you operate ,as what can be transferred into a trust differs depending on whether the company is incorporated or not.

For example:

• If the business is carried on by a limited company, the shares owned by the individual director would be transferred to the trust.
• For unincorporated businesses, such as partnerships or sole traders, the business assets would be transferred rather than the business itself.

Where business assets are transferred, they are protected rather than the business being protected, which is an important distinction to be made.

For business owners, the types of trusts typically considered are:

• Revocable trusts (living trust) – You can retain control over business assets during your lifetime and/or amend the trust as needed.
• Irrevocable trusts – This does not allow for changes once established but offers greater protection against creditors and legal judgments.

There are other types of trusts such as discretionary trusts which allow the trustee to decide how and when to distribute assets to beneficiaries, but these two are the most commonly used for business management and transfers.

The process of transferring your business or its assets into a trust may involve:

• Choosing the right type of trust – Decide whether a revocable or irrevocable trust best suits your needs in consultation with a legal expert.
• Drafting the trust agreement – This document will outline the terms of the trust, including the trustees’ powers and the rights of the beneficiaries.
• Transferring ownership – Legally transfer the ownership of your business assets into the trust, meaning you are no longer the legal owner unless you are also a trustee.

A trust can significantly streamline the process of passing your business on to the next generation.

The trustees you appoint will manage the business according to the terms of the trust, which can include instructions for eventual transfer of control to your chosen successors – minimising potential conflicts or disruption.

Is it right for me?

There are several advantages and drawbacks to putting a business and/or its assets into a trust, which you’ll need to consider when making a decision.

The advantages of placing your business in a trust largely concern tax and succession planning, including:

• Business asset protection – A trust can protect your business from creditors and legal claims, useful if your business is at risk of insolvency or liquidation.
• Tax planning – Trusts can be structured to reduce liabilities concerning Inheritance Tax and Capital Gains Tax, making them a tax-efficient option for business owners.
• Passing on your business – By placing your business in a trust, you can set out clear rules for how your business is to be managed and who will take over in your absence, which can prevent disputes and ensure continuity.

However, you should remember that there are complex rules governing the formation and management of trusts, so you should always seek advice when deciding whether to use them as a succession planning tool.

For advice and support with setting up a business trust, please contact our team today.