The answer to the question “can a trust own a corporation?” is “yes,” but only certain kinds of trusts are eligible. 3 min read updated on February 01, 2023.
The answer to the question “can a trust own a corporation?” is “yes,” but only certain kinds of trusts are eligible.
A trust is a distinct legal entity that oversees and retains certain assets on behalf of a beneficiary. A grantor designates a trustee to manage the trust’s assets on behalf of the beneficiary, chooses the beneficiary, establishes the terms of the trust, and donates the trust’s assets. In situations where beneficiaries are unable to manage the assets on their own, grantors opt to use trusts.
A company that elects to have the IRS grant it special tax status is known as a S corporation. Because their shareholders have the option to include the business’s profits and losses in their personal income taxes, S corps are not subject to the double taxation that other businesses are.
A family trust can be used to run a business, but there are several important things to consider before doing so. This article will discuss the pros and cons of using a family trust to run a business, as well as the different types of family trusts that can be used.
What is a Family Trust?
A family trust is a legal agreement that allows one person (the grantor) to transfer assets to another person (the trustee) to be held and managed for the benefit of a third person (the beneficiary). The grantor can be anyone, including an individual, a couple, or a business. The trustee can be an individual, a bank, or a trust company. The beneficiary can be anyone, including the grantor, the grantor’s spouse, children, or other family members.
How Can a Family Trust Run a Business?
A family trust can run a business by holding the business’s assets, such as cash, inventory, and equipment. The trustee can then manage the business on behalf of the beneficiaries. The beneficiaries will receive the profits from the business, and they will also be responsible for any losses.
Pros and Cons of Using a Family Trust to Run a Business
There are several pros and cons to using a family trust to run a business.
Pros
- Tax benefits: Family trusts can offer tax benefits, such as reducing or eliminating estate taxes.
- Asset protection: Family trusts can protect assets from creditors.
- Privacy: Family trusts can be private, as they are not required to be registered with the government.
- Continuity: Family trusts can provide continuity for a business, as they can continue to operate even if the grantor dies or becomes incapacitated.
Cons
- Cost: Family trusts can be expensive to set up and maintain.
- Complexity: Family trusts can be complex, and it is important to have a qualified attorney draft the trust agreement.
- Loss of control: The grantor will lose control of the business assets once they are transferred to the trust.
- Potential for conflict: There is potential for conflict between the trustee and the beneficiaries, especially if the business is not profitable.
Types of Family Trusts
There are several different types of family trusts that can be used to run a business.
Grantor Trust
A grantor trust is a trust in which the grantor retains control over the assets in the trust. The grantor is also responsible for paying taxes on the income from the trust.
Non-Grantor Trust
A non-grantor trust is a trust in which the grantor does not retain control over the assets in the trust. The trustee is responsible for paying taxes on the income from the trust.
Simple Trust
A simple trust is a trust that is required to distribute all of its income to the beneficiaries each year.
Complex Trust
A complex trust is a trust that is not required to distribute all of its income to the beneficiaries each year.
Using a family trust to run a business can be a complex decision. It is important to weigh the pros and cons carefully before making a decision. If you are considering using a family trust to run a business, it is important to consult with an attorney to discuss your options.
Frequently Asked Questions
Can a family trust own a house?
Yes, a family trust can own a house. The house would be held in the name of the trust, and the trustee would be responsible for managing the property.
Can a family trust own a car?
Yes, a family trust can own a car. The car would be held in the name of the trust, and the trustee would be responsible for registering and insuring the vehicle.
Can a family trust own a business?
Yes, a family trust can own a business. The business would be held in the name of the trust, and the trustee would be responsible for managing the business.
Can a family trust be used to avoid taxes?
Yes, a family trust can be used to avoid taxes. However, it is important to note that there are complex tax rules that apply to family trusts, and it is important to consult with a tax advisor to ensure that the trust is structured in a way that will minimize taxes.
Disclaimer
This article is for informational purposes only and should not be considered legal advice. It is important to consult with an attorney to discuss your specific situation.
Electing Small Business Trusts or ESBTs
The trust distributions in an Electing Small Business Trust (ESBT) have no effect on the income taxes of S corporations. The two distinct trusts that make up an ESBT keep the S corp stock apart from any other assets the trust may possess.
Like a QSST, an ESBT requires its beneficiaries to follow guidelines as well. The beneficiaries must be charitable organizations, estates, or individuals, and they cannot have bought their interest in the trust. Similar to a QSST, a trust must choose to be considered as an ESBT within two and a half months of either the trust becoming a stakeholder in the S corp or the S corps creation.
Grantor trusts are typically the preferred choice for a company that owns trusts. Grantor trusts have to be managed as if they were a single entity. The trust may continue to hold shares in the S corp for a maximum of two years following the grantor’s passing if the grantor passes away and the trust is still in existence. The trust cannot remain a stakeholder in the S corp if the grantor status is lost for any reason other than the grantor’s passing.
Since the grantors retain the ability to cancel the trust and use its assets while they are still alive, all living trusts are essentially grantor trusts from the moment they are established. Because they are designed to hold assets for the living and then distribute them upon death in accordance with the wishes of the deceased, living trusts are very popular in estate planning. All property, including S corporation stock, must be retitled while the grantor is still alive because a living trust owns the assets that were given to it by the grantor.
Issues can sometimes arise when the grantor dies and the S-corp election comes under scrutiny. If S-corp status is inadvertently terminated, there are some relief procedures offered by the Internal Revenue Service.
Qualified Subchapter S Trusts or QSSTs
A trust has the option to choose to become a Qualified Subchapter S Trust (QSST) at two different times. The first occurs 2.5 months after the trust acquires ownership of a stake in the S corp. The second occurs 2.5 months after the start of the S Corps’ first taxable year. The beneficiary of the trust must fulfill a number of rigorous requirements in order to be eligible to be a shareholder of a S corporation. The S corp may lose its tax status if the following conditions are not satisfied.
- Only one income beneficiary may be designated by the trust, and that beneficiary must be a U S. resident or citizen.
- Currently, the trust’s sole beneficiary is required to receive all income.
- The beneficiary must also collect all corpus distributions.
- The beneficiary’s income interest must terminate upon the beneficiary’s death or the trust’s termination, whichever occurs first.
- In order to be regarded as an eligible S corp shareholder, the beneficiary must choose to do so.