Trusts and corporations are valuable estate planning tools. Both serve as a way to keep an estate out of probate, because both are considered separate entities under the law. Anything they own is not owned by you, therefore it is not part of the estate (for probate purposes – the IRS has a different way of looking at things). But which one is better? This is particularly important when dealing with assets that will continue to produce income after death, such as businesses, investment properties or intellectual property (such as copyrights, trademarks, or patents).
The important thing to remember is that trusts and corporations are tools, with their own benefits and drawbacks. Which one is better will depend on your personal circumstances.
If you have a business that is already incorporated, then it would make sense to maintain the business and create a succession plan so that it will live on after you. If you have copyrights, trademarks or patents that are used by the business, it may be wise to transfer them to the business to avoid the risk of dealing with them in probate court.
If you do not have income-producing property, you would likely be best off with a trust. After you’re gone, the new trustee will step in, distribute all the assets, and close the trust. It’s time-consuming, but relatively straightforward.
When you have assets that will continue to bring in income after you’re gone, and you’re managing them as an individual, things start to get tricky. At that point you’ll need to ask yourself some questions: How much money is actually coming in? How much effort are the assets to manage? Who will the money be going to?
If the assets are bringing in significant income, and the management is complex enough to require a team, you may want to consider incorporating. Incorporating is an expensive process, but if it’s done right, then there are clear guidelines for how assets will be managed, and everyone’s job duties will be clearly defined. Turning the management into a business is a practical way to keep the assets profitable.
On the other hand, your assets may not be bringing enough income in to be worth the expense and hassle of incorporating. Perhaps you have outsourced the management already, and your job is simply to collect the checks and make sure the managers are doing their job right (never assume you don’t need to check on the managers – just look at what happened to Elvis Presley and Muddy Waters). In that case, you may want to simply go with a trust. While you don’t have the clear guidelines of how to manage the asset (unless the trust drafter was very thorough), the process is quite straightforward and much more informal.
The decision on which entity to use is largely a strategic one. If you would like to discuss the benefits and drawbacks at greater length, you can reach me at kaway@kawaylaw.com.