Global Reach: A New Ammunition Entity is Making its Mark in America and Abroad.
By Mark E. Battersby
It’s not only the ultra-wealthy that can benefit from operating their shooting sports business as a “trust.” In fact, there are a number of reasons for the growing interest in creating trusts for businesses Protecting assets, succession, and estate planning are often cited as reasons for creating a trust. Of course, there is also a downside since creating a trust is both expensive and complex.
In addition to the initial start-up expenses, business trusts require a cost to maintain, including paying a third party to manage it. And, not surprisingly, there are also ongoing legal costs. However, complexities and costs aside, there are many reasons why a shooting sports retailer or manufacturer might benefit from a trust.
Business Trust Basics
Trusts are unincorporated business organizations (UBOs) created for the benefit and profit of shareholders, who are known as “trustees.” In a business trust, a trustee manages the shooting, hunting and outdoor equipment business and conducts transactions for the benefit of the beneficiaries.
The trustee can be a company or an individual, including the business’s owner. The business owner can be the sole trustee of the trust that hold the business as well as being a beneficiary so long as the owner is not the sole beneficiary.
By using a LLC (Limited Liability Company), parents can transfer shares of their LLC to their children without giving up control of the business.
Business Trust Flavors
The shooting sports operation’s current operating entity arrangement may be good as it is, but don’t overlook the trust. Just as there are a number of trusts, there are several categories of trusts for businesses, including:
- Grantor Trusts. This trust is generally self-contained and consists of a grantor, a trustee, and a beneficiary. The grantor pays taxes on the income generated by the trust and has complete control over it, including control over business distributions to the beneficiaries.
- Simple Trusts. In order for a trust to be included in this category, its status must be approved by the IRS. With a simple trust, the trustee must distribute business profits directly to the beneficiaries and is prohibited from other actions including touching any principal assets.
- Complex Trusts. A complex trust is, in many ways, the opposite of a simple trust although it isn’t managed by the trust’s beneficiaries. Profits from the business and other funds may be distributed only in part to beneficiaries and may even be contributed to other organizations, such as charities. In order to maintain its status as a complex trust, the trust must have at least some form of income.
Don’t Overlook the Family Trust
While business trusts are usually set up for individuals who may or may not be family members, a family trust is used when a family’s assets are held to run a family business. The family trust offers tax and financial advantages to individual family members and provides capital and income to benefit the entire family. Such trusts are also often used in conjunction with living trusts or a special needs trust.
With a family trust, the trustee is the decision maker who determines what to do with the operation’s assets and how to allocate capital gains and income to beneficiaries. The trustee here can be a family member or a third party and beneficiaries are family members or a family member’s business.
There are a number of benefits for creating a family trust, including ensuring family members receive their share of the business and avoiding public disclosure of a trust’s assets. A family trust is essential for estate planning and ideal for shooting sports business owners who want to continue the legacy of their business or hand over management to someone they designate.
In fact, if the owner has no heir to run the business, ownership to the trust can be passed on and a CEO appointed to ensure regular income disbursements continue. However, while there are benefits to creating a trust, not every family needs a family trust. Fortunately, there are a number of other options.
The shooting, hunting or outdoor sports business may be better suited to operating as a limited liability company (LLC), a partnership, or some other type of entity.
Although there are many tax benefits to setting up a trust, IRS regulations can be very complicated, so seeking the help of a knowledgeable professional is always recommended.
The Alternatives
A number of strategies have been developed over the years for passing family wealth, the business, or other assets to the family—or others. Among the options:
- LPs. Parental control of the business is ensured in the LP because limited partnership interests are transferred, while the parents retain the general partnership interest. Limited partners cannot, of course, participate in the management of the business.
Using a LP or LLC, parents can transfer shares of their LP or LLC without giving up control of the business.
- LLCs. An LLC can be used to accomplish the same purpose, with all of the owners having limited liability for the operation’s debts. An LLC can be structured as a “member-managed” entity where all owners participate in management, or it can be formed as a “manager-managed” entity where the owners who are also the managers control the business.
- FLLC. A family limited liability company (FLLC) must meet IRS requirements or risk being labeled as something else. The owners must be careful to put only business assets into their FLLC and limited partners (typically the children of the owners) may be exposed to future capital gains liability.
A Question of Taxes
Trusts are taxed similarly to incorporated shooting sports businesses for federal tax purposes and many state income regulations. Trusts are managed by trustees who have a financial responsibility to act in the best interest of the beneficiaries. Thus, profits (and losses) from the business are equally distributed among the beneficiaries.
The federal tax rate for a trust is 37 percent on income over $14,450. This high tax rate incentivizes trustees to distribute income to the trust’s beneficiaries who may be in a lower tax bracket.
Instead of trusts paying tax on its income, it is the beneficiaries that usually pay tax on any distribution they receive. However, the beneficiaries do not pay tax on distributions received from a trust’s principal, which is the initial amount of money transferred to the trust.
Down the road, trusts reduce estate taxes by removing business ownership from the owner’s estate. This lowers the estate’s overall value and can decrease estate tax. Of course, to benefit fully, it is important to properly structure the trust in such as way the taxes are reduced.
Although trusts are ordinarily associated with succession or estate planning, they can, in some situations, be an invaluable tool for the owners of a shooting sports business. A business owner can hold the business in a trust instead of using another business entity such as an LLC, partnership, or corporation.
Trusts offer several potential benefits—and potential pitfalls—compared to more traditional business structures. A trust can, for example, protect the business from creditors and lawsuits. A trust can also be used to transfer business assets to the owner’s heirs without going through probate.
Of course, while there are benefits to establishing a trust, there is the downside to consider. Trusts are, as mentioned, expensive to set up and complex to maintain. They also require the trustee to undertake annual administrative tasks and, once established, can be difficult to dissolve or to make changes.
Avoiding An Expensive Future
Before deciding whether a trust is right for your operation, consider the implications of the transfer because it will impact on the status of all parties involved. Understanding the pros and cons, the different types of trusts and the legal implications can help in deciding whether a trust makes sense for your operation.
It can’t be emphasized enough that a trust is not for every business nor every owner. However, scheduled and proposed changes to the tax rules may prompt many to investigate using a trust.
Under the soon-to-expire Tax Cuts and Jobs Act (TCJA), the federal estate tax, often labeled as the “death tax,” only applied to estates passed on to heirs valued over $13.61 million. The recently proposed budget would reduce the threshold at which the death tax kicks in to approximately $5 million. Reforms contained in a proposed Congressional bill would reduce the threshold to $3.5 million.
And, then there is the significant increase to the estate and gift tax exemption. The TCJA significantly increased the amount that could be transferred without incurring estate or gift taxes to the point where, right now, it’s possible to transfer as much as $13,610,000, without owing taxes. Married couples can combine their exemptions to transfer $27,200,000.
The soon-to-expire exemption will mean any excess above $6 or $7 million in assets may be subjected to a 40 percent transfer tax. This may cause not only the wealthy and investors, but many shooting sports business owners, to think about transferring assets, hopefully with guidance from a knowledgeable professional.
Obviously, no business owner should assume that a trust is the answer for their shooting sports business. Needless to say, the advice of an estate planning professional as well as the operation’s legal, tax, and accounting professionals is extremely important.