Business Protection and the use of Trusts

How to use a trust to protect a business from creditors.

Sunday, November 19th 2000, 11:50PM

There are many articles and publications about Funeral Trusts, Charitable Trusts and the protection of your future with Trusts. These are mainly focussed on the individual, however for people running their own business, a Trust can provide a very flexible, effective means of protection from creditors.

How do you conduct a business? As a sole trader? As a partnership? As a limited liability company?

There are many thousands of limited liability Companies conducting business in New Zealand and the smaller "family" type business is common. You know them….2-3 shareholders, maybe 6-10 employees and quite successful in an unassuming way.

But often the shareholder employee is vulnerable to their personal assets being attacked by creditors if the business stumbles – many will have given personal guarantees to lenders and this creates personal liability on the business owners for the company debts. Their personal assets, including the family home may have to be sold and used to meet company debt. The traditional protection of a "limited liability" company is therefore eroded.

Also, in recent years the impact of legislative changes has greatly increased the potential liability faced by company directors. Whilst insurance can meet some of that liability, it cannot cover all situations and in a worse case scenario, a failed company can bring it’s directors to their financial knees.

Use a Trust and Increase Your Protection!!!

Under this arrangement the shares in the company are sold to a Trust with the sale price gifted over ensuing years.

The former business owners are now just employees with future profit either retained in the business or passed in the form of dividends to the new shareholder, the Trust.

The advantages to the former shareholder/s are that the future profits can flow to the Trust, where they have a higher element of protection from creditors, than if they were used to increase the former shareholder/s personal asset values.

The trustees can then make decisions as to the use of the income that has been received by the Trust in the form of dividend. It may be that investment assets are purchased and if this is the case, those assets are of course owned by the Trust and not by the former shareholders of the business and are therefore not available to creditors.

This protects business assets, but to separate business assets and personal assets consideration should be given to holding the other assets (eg home, long term investments) in a separate Trust, e.g. a Family Trust, to remove those assets from exposure to business risk.

It follows naturally that businesspeople should consider Trust structures to hold most if not all their business and personal assets, to provide an element of protection from business failure. It is interesting indeed to read the lists of shareholders in Companies and frequently come across the shareholder "The…….Family Trust". Now you know why!

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