What Is a Business Trust and How Does It Work?

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When it comes to trusts, most people are familiar with individual trusts, trust funds or family trusts that are connected to an individual or family. But another type of trust exists for entrepreneurs and companies called business trusts, which are also known as common law trusts. A business trust is a legal instrument that can be used to delegate the authority to manage a beneficiary stake in a certain business. It can also be used to run the business itself. However, there are multiple types of business trusts, with each working slightly differently. If you’re thinking of using a business trust, it might be a good idea to consult with a financial advisor.

What Is a Business Trust?

Functionally, a business trust is quite similar to an individual or family trust. It helps delegate control of assets to a trustee, who manages the trust and its contents on behalf of the grantor. An individual trust typically contains assets such as money or property, but a business trust holds the rights to an individual’s stake or interest in a business. As a result, a business trust can be the legal entity that technically owns a business.

Business trusts can have one or multiple beneficiaries. A business can be owned by multiple trusts and entities or just a single one. They are primarily used to safeguard against taxes and liability, as trusts tend to have different legal protections than individuals. However, the specifics of these rules can vary by state.

How Does a Business Trust Work?

A business trust is a legal agreement. In turn, the process of creating one typically begins with a conversation between the involved parties and a trust lawyer who can help define the terms of the agreement. Following this, the trust is legally created through what is called a declaration of trust.

The declaration of trust details the terms of the trust and delegates instructions and responsibilities for the trustee. These may include the valid length of the trust and the duties, powers and interests of the beneficiaries. Once the terms are settled, the one who owns the trust signs the declaration, officially creating it in the process.

The trustee of a business trust has a fiduciary duty to act in the best interests of the beneficiaries of the trust. This is the same kind of fiduciary duty that applies to other financial situations. Most notably, SEC-registered financial advisors have a fiduciary duty to act in the best interests of their clients.

The trustee is the one who holds the rights and control of the business stake in the trust. It’s typically one individual serving as a trustee of a business trust. At the end of the trust’s length, the business interests transfer to its beneficiaries. Business trusts are treated as corporations and may conduct business transactions just like individuals.

Types of Business Trusts

Just as there are several different types of individual trusts, there are three main categories of business trusts. Here’s a breakdown of each:

Grantor Trust

The first type is called a grantor trust. Grantor trusts consist of a grantor, a trustee and a beneficiary. This type of trust is very self-contained. The grantor pays taxes on the income that comes from the trust and has complete control over it. This includes control over business distributions to the beneficiaries.

Simple Trust

Next is a simple trust. For a trust to fall into this category, its status must be verified by the IRS. With a simple trust, the trustee must distribute business profits directly to the beneficiaries. It’s also prohibited from doing things like touching any principal assets.

Complex Trust

A complex trust is in some ways the opposite of a simple trust, though it still isn’t managed by the beneficiaries of the trust. Business profits 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 status as a complex trust, the trust needs to have at least some form of income.

Pros and Cons of Business Trusts

There are several benefits and downsides to opening and using a business trust. The most prominent perk has to do with liability. Similar to an LLC or corporation, business trusts are created so that the beneficiaries of the trust can reap the benefits of owning and often running the business, while being protected from individual liability. Business trusts are also beneficial because they provide an added layer of privacy and it’s easy to set distribution terms for beneficiaries.

On the flip side, business trusts can be expensive and difficult to maintain. You’ll want to work with a lawyer to open a trust, but you’ll probably want to retain their services throughout the life of the trust to ensure it continues to operate the way you want it to. This process isn’t always easy, as business trusts can face a variety of obstacles when it comes to legal compliance. Additionally, business trusts typically can’t have lifetimes of longer than 99 years, so multi-generational arrangements may not be an option.

How to Set Up a Business Trust

If you’re interested in setting up a business trust, the first step is to talk to an attorney that can help. As we state above, you’ll likely need to work with an attorney throughout the life of your business trust. Note that trust lawyers typically charge around $500 per hour and the outright cost to set up a business trust could be more than $5,000.

Once the trust is up and operating, the hardest part is officially out of the way. While you may need to amend the trust down the road, you’ll have to detail some of the most important terms, such as the distribution schedules, trustees and beneficiaries.

Bottom Line

A business trust is often difficult to set up, and it’s not a necessary part of every business out there. Your business arrangement may be good as it is, or you may be better suited to use a limited liability corporation (LLC), a partnership or another type of structure. Before you pull the trigger on creating a business trust, it’s important to figure out the key elements surrounding it.

Tips for Business Planning

  • Deciding how to structure your business isn’t always an easy task. It can help to have a financial advisor in your corner, guiding you through some of the toughest decisions. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors, get started now.
  • When deciding on a business plan, it’s important to cover all the necessary details, from future income projections to leadership hierarchies. Check out SmartAsset’s guide to writing a financial plan for a business.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/Yagi-Studio, ©iStock.com/seb-ra

Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.

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What Is the Best Way to Finance an ATV?

All-terrain vehicles, also known as ATVs, provide the ultimate way to get around. You can take your off-road vehicle for an epic adventure through the mountains or a forest. You can reach speeds as high as 60 to 65 mph, or race your friends on an out-of-the-way ATV track. Whether you prefer a three-wheeler or four-wheeler, as long as you’re safe, you’re always in for a good time.

riding atvs

While you can often rent an ATV, many people love buying their own so it’s ready and waiting whenever they’re up for an adventure. Unfortunately, the high price of ATVs means that not everyone can afford them — at least not if they have to pay all at once.

How do ATV loans work?

ATV financing works much like financing an RV or a car. You can finance an ATV from one to six years and pay off the cost of your ATV with monthly payments plus interest. The exact specifics of your loan will depend on what type of ATV financing you choose.

Your ATV financing options include personal loans, credit cards, and retailer financing which we will cover below. On top of that, you can also have the option of applying for a loan at a bank or credit union.

How much do ATVs cost?

ATV loans provide a way to finance an ATV and pay it off over the course of several months or years. But, before we dive into loans for ATVs, it’s crucial to talk about how much these recreational vehicles usually cost.

You may have done some research already, but if not, these stats can provide you with a general idea of how much you may need to borrow.

ATV Retail Prices

Here are some ATVs along with their retail price in 2021:

  • Apollo Sniper 125cc ATV: $1,069.95
  • TaoTao 250 Rhino Adult Utility ATV Blue: $1,669.95
  • Monster X 550cc ATV Four-Wheeler 4 x 4 Utility ATV: $4,979.95
  • 700cc 2 Speed 4×4 Fully Automatic ATV: $7,299.95
  • Crew 750 UTV Utility Vehicle 4×4: $12,499.95

As you can see, ATV pricing is a lot like pricing for automobiles — all over the place. You can buy larger, fully-loaded ATVs with all the bells and whistles. But, you can also buy very basic models with fewer upgrades and less room.

ATVs with more power and the potential for higher speeds also tend to cost more, so make sure to think long and hard about what you want in an ATV and how much you want to spend.

ATV Financing Options

Once you know more about the type of ATV you want and your budget, it makes sense to shop around for ATV financing ahead of time. Here are some of the main ATV loan options along with some details on their pros and cons and who they’re best for.

Personal Loans

Personal loans are probably the most popular option for ATV financing because they are flexible and tend to come with affordable interest rates.

Most lenders let you borrow up to $35,000 with repayment timelines ranging from 12 months to 60 months. While your APR will depend on your creditworthiness, it comes with a fixed rate you can depend on, a fixed repayment schedule, and a fixed monthly payment.

Advantages

  • Enticing rates for individuals with good or excellent credit.
  • With a fixed monthly payment and fixed repayment schedule, you’ll know exactly how much you owe each month as well as when your ATV will be paid off.
  • Since they are unsecured, your ATV won’t be repossessed if you stop making monthly payments.
  • It’s easy to shop around and compare loans and terms online.

Disadvantages

  • If you have fair or poor credit, your personal loan may not come with a competitive interest rate.
  • Some loans come with fees like an origination fee or application fee, although many lenders offer loans without any fees.

Personal Loans are Best For:

  • Consumers who want a fixed payment and repayment schedule
  • People with good credit who can qualify for the best interest rates
  • Anyone who wants to get their financing in place before they shop for an ATV

Credit Cards

Credit cards offer a financing alternative, although they could be more expensive than other options since the average credit card APR is currently over 17%. Since some credit cards offer 0% APR on purchases for a limited time, however, you may be able to use a credit card as a free short-term loan.

Advantages

  • If you can qualify for a credit card that offers zero interest on purchases, you could pay your ATV off without any interest for up to 15 months.
  • Some credit cards offer low introductory rates.
  • Credit cards are easy to research and apply for online.

Disadvantages

  • Outside of cards that offer 0% APR for a limited time, most credit cards come with higher interest rates than a personal loan.
  • Even if you do get 0% APR for a limited time, your interest rate will reset once the introductory period is over.
  • Credit cards only require you to make a minimum payment, and this could leave you paying off your ATV for a long time if you don’t have the discipline to pay more.

Credit Cards are Best For:

  • Anyone who could qualify for a card that offers 0% APR on purchases and pay their ATV off during their introductory offer
  • Someone who has a credit card with a low APR
  • People who want some flexibility in terms of how much they pay toward their ATV loan each month

Retailer Financing

Some retailers offer special loans or credit cards you can use to finance your ATV. These options are typically based on the manufacturer you buy an ATV from and special promotions they have in place. As an example, at the time of this writing, Yamaha is currently offering 0% APR for six months. Although your interest rate will reset between 15.99% and 23.99% after your offer ends.

Polaris also offers a Visa credit card that comes with 0% APR for six months *this offer has expired*, 2x points on Polaris and gas station purchases, and 1x points on everything else you buy. Once again, however, the interest rate surges considerably higher once the six months are over.

Advantages

  • Retailer financing is convenient to use when you apply for financing at the ATV dealership.
  • You may be able to get 0% APR for a limited time.
  • Some dealers may work with several lenders, giving you the option to shop around for the best deal.

Disadvantages

  • While you may avoid interest for a few months, retailer financing tends to come with high rates.
  • If you rely on a certain type of retailer financing, this may prevent you from shopping among other ATV brands for a better deal.
  • If you use retailer financing to pay for your ATV, the ATV is considered collateral. This means it could be repossessed if you stop making payments.

Retailer Financing is Best For:

  • Someone who wants to apply for ATV financing while they shop
  • Anyone who doesn’t mind the fact their ATV will be used as collateral for their loan
  • People who may be able to benefit from special promotions their dealership offers if they use retailer financing

Bad Credit ATV Loans

Is it possible to buy an ATV with no credit or bad credit? Absolutely. These loans obviously come with higher rates and may require a down payment. However, it’s still possible to get a personal loan or ATV financing through a retailer even with bad credit.

Bottom Line

The right ATV loan could help you finance your new recreational vehicle in a responsible way without having to wait until you have the entire purchase price saved in cash. Before you borrow money, however, make sure to compare loan options and read the fine print.

While an ATV loan could help you get the ATV you want within a matter of days, you may be making monthly payments for years. Make sure you understand how your loan works before you commit, and you’ll be glad you did.

Source: crediful.com