Should you have a business trust? Should your Trust own your business? These aren’t the same question. A business trust differs significantly from a trust owning a business. Understanding this distinction is crucial to avoid costly errors. This article explores when a business trust is beneficial and when your trust should own your business entity.
The Wide and Easy Road
Bob and Sue set up a trust and owned a business, along with REITs and DSTs. After their deaths, their family faced probate, family power struggles, and avoidable taxes because neither the business nor investments were in the trust. This common mistake stems from assuming a trust is unrelated to business assets. Don’t follow Bob and Sue’s path.
A Rose By Any Other Name
In the U.S., business trusts and estate planning trusts are similar entities, distinct from the individuals involved. A “grantor” or “trustor” creates the trust, a “trustee” manages it, and “beneficiaries” receive the benefits. The trust must own assets. Both types manage control, taxation, liability, distributions, and changes over time.
Common Elements
Trustees have a “fiduciary duty” to administer assets for beneficiaries. In some cases, both trust types offer privacy. Certain jurisdictions impose mandatory termination dates, making a trust’s mobility valuable. Depending on structure, trusts can be taxable or “pass-through” entities, allowing income to be taxed to the most efficient taxpayer—a strategy business trusts often use but entry-level estate planning trusts overlook.
The Road Forks
Despite similarities, business and estate planning trusts differ significantly:
- Estate Planning Trust: Manages a small family’s assets over time. Trustees are often family members, qualified by relation, not expertise. Beneficiaries inherit benefits, not by choice or contribution, and are typically restricted to the grantor’s descendants or relatives.
- Business Trust: Created for investment or financial purposes, managed by professional trustees. Beneficiaries opt in by investing, and nearly anyone with financial means and qualifications can participate, making it attractive for capital contributions.
Best Uses
Business trusts suit diverse investors in sectors like real estate, energy, or infrastructure due to tax advantages, flexible asset management, and investment liquidity. Investors, not the trust, pay taxes. If you’ve invested in a REIT (Real Estate Investment Trust) or DST (Delaware Statutory Trust), you’ve engaged with a business trust. Shares in such trusts should ideally be held by your estate planning trust or an entity it owns.
Don’t Go There
Business trusts are complex, costly, and vary by jurisdiction, making them prone to errors without expert legal and financial advice. They’re rarely suitable for family-owned or small-group businesses, where other entities are typically better fits.
Choice of Entity
Business ownership options include sole proprietorships, general partnerships, corporations, limited partnerships, LLCs, or business trusts, each with unique control, tax, risk, operational, and compliance implications. Optimally, create an estate planning trust first to own any business entity you establish.
Go This Way
Your estate planning trust should own your business entity, not act as one. Here’s why:
- Avoid Probate: Business entities owned personally at death may trigger probate, like real estate or non-retirement assets. Placing them in a trust prevents this.
- Succession Plan: A trust designates successor trustees to control the business and outlines who receives benefits, when, and under what conditions.
- Wealth Preservation: A well-crafted trust fosters multi-generational wealth growth, preventing rapid depletion from division or sale.
- Versatility: A robust trust can own most business entities, including S corporations, a hallmark of high-quality trusts.
- Risk Management: Trusts protect assets from in-laws, ex-spouses, substance abuse, or spendthrifts, safeguarding both family and wealth.
- Tax Efficiency: Trusts allocate tax liability to the most efficient taxpayer, a feature entry-level trusts often lack.
- Integration: Trusts and business entities must work together. Integrated plans can eliminate estate taxes across generations, a strategy the ultra-wealthy use to sustain wealth.
- Family Protection: An integrated structure reduces the risk of inherited wealth harming your family.
The Planning Trap
Bob and Sue hired excellent attorneys for their trust and business entities, each skilled in their domain. However, neither coordinated with the other, resulting in fragmented plans that conflicted. The business and estate plans undermined each other.
Escaping the path of least resistance requires deliberate effort and an experienced guide.
Trust Business © 2025 by Rick Durfee is licensed under CC BY 4.0 
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