What Are Business Trusts?

Massachusetts Trust

A business trust, sometimes referred to as a “Massachusetts trust”; or “common-law trust”; is an unincorporated business organization created by a trust instrument. This instrument outlines the trust’s structure and governs its operations. The trust holds property and engages in business activities for the benefit of its beneficiaries, who hold transferable shares. Unlike corporations, business trusts are often used to manage and protect assets, allowing for a flexible structure that can meet various business needs.

Business Trust vs A Trust Company

While both a business trust and a trust company involve the management of assets and the concept of fiduciary duty, they serve distinct purposes and operate differently. A business trust is primarily established for managing and protecting business assets, while a trust company provides professional management of trusts and estates for individuals and other entities. Business trusts are unincorporated entities governed by a trust instrument, whereas trust companies are formal financial institutions regulated by state and federal authorities.

Beneficiaries of a business trust hold transferable shares, whereas beneficiaries of a trust managed by a trust company typically do not hold shares but are entitled to the benefits as outlined in the trust agreement. Business trusts focus on asset management and business activities, while trust companies offer a broader range of services including estate planning, investment management, and administration of trusts and estates.

Creation of a Business Trust

The creation of a business trust involves several key steps. The first step is drafting a trust agreement, which serves as the foundational document. This agreement should clearly articulate the trust’s purpose, the duties and powers of the trustees, the rights of the beneficiaries, and the operational procedures. Trustees are then appointed to manage the trust’s assets in accordance with the trust agreement. They have fiduciary duties to act in the best interest of the beneficiaries. The settlor (the person who creates the trust) transfers assets into the trust. These assets can include real estate, securities, or other business property. In some states, registering the business trust with the appropriate state authority is necessary. This step often involves filing specific forms and paying fees.

Advantages

Business trusts offer flexibility, asset protection, and potential tax benefits. Since the trust holds the property, it can shield assets from creditors and avoid probate, ensuring smoother transitions. Trusts can manage real estate, securities, or business ventures, and are often private, as trust agreements aren’t always public record.

Due to varying state regulations, it’s essential to understand the specific requirements for forming and registering a business trust. When structured properly, business trusts can be a powerful tool for managing and protecting assets.