Business Trusts
Whilst asset protection is also the purpose of Business Trusts, efficient tax planning and business succession issues are motivators in establishing Business Trusts
For people owning businesses and not using a Business Trust, are these concerns? :
- Are my personal assets at risk if my business creditors attack?
- If my business fails, are all my personal assets, including my house, in danger of being lost?
- Is the growth of my business likely to create estate planning concerns?
- Is my current business structure fully utilising available tax efficiencies?
- Are my personal assets and business assets so intermingled that they are unnecessarily placed at risk?
- Can my present structure allow the efficient passing on of my business assets when I die?
Personal asset protection
One of the worst case scenarios for business people is to witness the decline and failure of their business and the consequent loss of all personal assets in the event of receivership. The protection offered by a Business Trust will go a long way to alleviating this situation. Creditors and receivers have the ability to make claims on personal assets, including the family home, if the structure of the business operation is inappropriate and intermingling of personal and business assets has occurred. As Business Trusts tend to be more active, they are more open to challenge and if dismantled because they are considered a sham, the family home can be put at risk if it is a part of the Business Trust. For this reason, Business Trusts should hold the business assets and Family Trusts the family assets. Protection of the family home above all other considerations is most likely to be paramount and a Business Trust will allow for this to happen.
Business asset protection
In the event of businesses failing, or business creditors taking action for settlement of outstanding debt, unless proper planning has been implemented, personal assets can be exposed to loss. NZ is made up of many tens of thousands of small businesses, most of which conduct their business as a limited liability company. However the protection of limited liability is often removed when lenders to the business require personal guarantees of the business owners. Often this is the businesses bankers. For this and other reason, savvy business owners will establish a Business Trust and move their shares in the business into the trust thus ring fencing them and offering them the protection of a trust structure. Business assets are separated from family assets in the event of business failure or legislative change and it is the business assets alone that are vulnerable to claims. Also, if the shares in a new company are transferred to a Business Trust, the value of the transfer can often be minimal and the Business Trust will own the future growth in the share value. On retirement or sale of the business, the value of the asset is in the Trust where it should be.
Business succession planning
Too often a business will stumble, falter and even fail completely when a business partner dies or becomes seriously disabled. The succession planning of business owners can be greatly enhanced by the use of Business Trusts but too often we see inappropriate ownership of the Company’s shares, inadequate or no buy-sell agreements in place, inadequate or no life and disability cover on the principals and other weird and wonderful business structures in place. A properly constituted buy sell agreement, correctly documented and supported by appropriate life and disability cover and ownership of the shares held in robust Business Trusts will allow for a desirable succession plan to occur should disaster strike. The Business Trust is an integral part of this planning.
Tax efficiency
The import of tax in both personal and business situations should be minimised as much as possible and legally allowable. Once again, Business Trusts can play a prominent part in minimising tax. Often a principal business operator will be paying tax at the highest rate. In general terms, dividends flowing from a Company to a Business Trust in which a family trust is a beneficiary may allow the income from the company to be split amongst beneficiaries of the family trust who are taxed at lower rates. Usually transferring assets to a Trust requires a lengthy gifting programme. This can be dramatically shortened if dividends in the Company are capitalised, and used to repay debt to the settlor.