You may understand that trusts are an estate planning tool that can protect your assets from estate taxes and ensure your loved ones have what they need after your death. However, a trust is more than that: It is also a type of ownership. As such, it can be a tool for your business, as well.
When you create a trust, you are creating an entity apart from yourself. At that time, you name a trustee, which could be you, another person or several people. You also name beneficiaries who will benefit from their interest in the trust. To fund the trust, you transfer the ownership of an asset from yourself or your company to the trust, placing the responsibility for it in the hands of the trustee.
Purpose of a business trust
The Virginia Business Trust Act elaborates further on how a business trust works. This tool allows the trustee or trustees to hold, operate, manage, control, invest, reinvest or administer the property in the trust. The people who benefit from these actions are those beneficiaries who have an interest in the asset. You could be both a trustee and a beneficiary.
A business trust could qualify as a mortgage investment conduit, which holds the mortgages and allows the interest to pass through to the beneficiaries. A business trust could also be a real estate investment trust, which allows beneficiaries to invest in real estate assets by purchasing stock in the entity. The trustees may lease the properties and collect the rent, then pass the income along to the beneficiaries, who would pay income tax on those dividends.
Benefits of a business trust
Not only does the trust offer tax benefits, but it also shields you from liabilities and debts that might come through the business. If, for example, the company were to go bankrupt, your own personal assets would not be at risk. Likewise, if there was a lawsuit, you would not be held personally liable. Your creditors would not be able to pursue your company to cover your personal debts. If someone sued you, personally, the assets in the trust would be safe.