By Mark E. Battersby

re you operating a self-storage facility or business as a “trust?” Today, it’s not only the ultra-wealthy who are reaping the many benefits of operating their facilities and businesses as a trust. In fact, there are several 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 manager. And, not surprisingly, there are ongoing legal costs as well.

Added to the extremely important initial legal advice and assistance often necessary when establishing a business trust, legal fees are extremely important to ensure the trust is in compliance with both federal and state tax laws. However, complexities and costs aside, there are many reasons why a self-storage professional might benefit from a trust.

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 self-storage facility or business and conducts transactions for the benefit of the beneficiaries.

The trustee can be a company or an individual, including the business’ owner. The business owner can be the sole trustee of the trust that holds the business, as well as being a beneficiary, so long as he or she is not the sole beneficiary.

The self-storage 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 individual trusts, there are several categories of business trusts, including:

• Grantor Trusts – Grantor trusts are generally self-contained and consist 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.

Just a note: Trust beneficiaries are required to pay tax on income received from a trust. A simple trust can deduct certain expenses and must file a tax return. A simple trust that does not meet the IRS’s definition may be classified as a complex 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. They’re 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 self-storage professionals who want to continue the legacy of their business or hand over management to a designated person.

While there are benefits to creating a trust, not every family needs a family trust. In fact, if the operator 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.

The self-storage operation may be better suited to operating as a limited liability company (LLC), a partnership, or some other type of entity. Fortunately, there are a number of other options.

Regular, incorporated self-storage businesses have never been utilized to transfer wealth or to protect assets. However, several strategies have been developed over the years for passing family wealth, the business, or other assets to the family or others. Here are some of the options:

• LPs – Using a limited partnership (LP) or a limited liability company (LLC), parents can transfer shares of their LP or LLC without giving up control of the business. 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.
• LLC – 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 the IRS’s requirements or risk being labeled as something else. The owners must be careful to put only business assets into their FLLC; limited partners (typically the children of the owners) may be exposed to future capital gains liability.

Business trusts are axed similarly to incorporated 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 self-storage facility or business are equally distributed among the beneficiaries.

The federal tax rate for a trust is 37 percent on income over $15,200 (2024 income). 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 their income, it is the beneficiaries who 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 a 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 self-storage facility or 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, a trust can be difficult to dissolve or change.

Before deciding whether a trust is right for the self-storage operation, an operator should 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 self-storage facility 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,” is 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 $5.49 million. Reforms contained in a proposed congressional bill would reduce the threshold to $3.5 million.

Obviously, no operator should assume that a trust is the answer for their self-storage business. Needless to say, the advice of an estate planning professional, as well as the self-storage operation’s legal, tax, and accounting professionals, is extremely important.