Protecting you and your business: using trusts

Have you ever wondered about the best ways to protect you and your business?

Here we’ll look at the key ways to use trusts, insurance and risk-management techniques to protect both your personal assets and the future of the company, and how you can use a trust to shelter your assets.

What is a trust?

Before we go any further, let’s explain exactly what a trust is and how they can be used.

A trust is a legal arrangement where a person (the settlor) transfers ownership of certain assets to another person or entity (the trustee) to hold for the benefit of one or more third parties (the beneficiaries). These assets could be money, property or shares etc.

It's essentially a separation of legal ownership from beneficial ownership.

These are the three main parties involved in a trust

Settlor: The person who creates the trust and contributes the assets. In this instance, the settlor is likely to be you, the small business owner.

Trustee: The person or entity (this could be an individual or a company) who holds legal title to the assets and manages them according to the trust deed. They have a fiduciary duty to act in the best interests of the beneficiaries. Trustees are likely to be you and  your family members, or anyone in the business who you decide to make a trustee.

Beneficiaries: The individuals or entities who are entitled to benefit from the assets held in the trust. This will usually be the family members or other interested parties that you wish to be beneficiaries of the assets held in the trust.

What’s a trust deed?

The rules for how the trust operates are set out in a legal document called a ‘trust deed’.

The trust deed is a legal document that formally establishes a trust. It outlines the trust's rules, names the settlor, trustees, and beneficiaries and defines the trustees’ powers and duties.

The deed also dictates how assets within the trust are to be managed and distributed to protect personal assets from business liabilities.

How can you use a trust to protect your personal assets?

Running a business comes with a certain amount of inherent risk. There’s potential for the business to go bust, for creditors to come after your assets, or for individuals and organisations to make legal claims against you and the business.

Setting up a family trust to shelter your personal assets allows you to separate your personal financial security from these inherent risks of running a business.

The trust creates a legal barrier between your individual wealth and any financial liabilities or claims arising from the business.

Here are the five key reasons why a trust is worth considering

1. Shield your personal assets from any business liabilities: If your business faces bankruptcy, lawsuits, or significant debt, your personal assets can become vulnerable. This is especially true for sole traders or partnerships, where you don’t have the protection of limited liability as an incorporated company. By transferring your assets to a trust, these assets are legally owned by the trustee, not you personally. This makes them inaccessible to the owner's personal creditors, in most cases.‍
2. Mitigate the risk of being an entrepreneur: Being an entrepreneur involves taking on certain risks. Sales can plummet, businesses can fold and unexpected external conditions can scupper your well-laid plans as a business owner. With your personal assets held in a trust, you can take calculated business risks knowing that your family home, savings and other personal investments are safeguarded. The family trust provides you with a crucial safety net to secure yours and your family’s future.
3. Enhance your estate and succession planning: Protecting your personal assets is the key function of the trust. But a well-managed family trust can also help with the orderly transfer of your assets to future generations. Having the family trust set up prevents your hard-earned assets from being tied up in your estate upon death. This is great for estate planning and helps your immediate family achieve a smoother transition and protects these important assets from potential claims against the estate.
4. Balance control vs. ownership: As the business owner, once your assets are held in a trust you are no longer the legal owner. However, through a trustee or appointor role, you can still maintain a significant degree of control over how the assets in the trust are managed and distributed. Even though you no longer hold legal ownership of these assets, you can still balance a level of control over the assets, while also enjoying the benefits of reduced liability and risk.
5. Benefit from better tax planning, in some instances: Asset protection is the primary driver of a family trust. But having the trust in place can also make it easier to distribute income among beneficiaries in different tax brackets. As such, there may be an opportunity to enhance the overall tax position of the whole family. Tax planning within a trust structure is a complex area and should always get professional advice from your tax adviser.

Helping you enjoy the protection of a family trust

Having worked so hard to create a profitable business, it’s vital to take every opportunity to protect your personal assets and the future prosperity of your family and loved ones.

Talk to our team about the key benefits of setting up a family trust, and the potential benefits you could achieve in your own specific business and family situation.