Common-law trusts, also known as pass-through trust agreements, are based on private contracts, unlike statutory trusts which are based on state laws. The private contract that creates a common-law trust is linked to Article 1 Section 10 of the Constitution, which ensures that nothing can come in the way of you and the private contract you create. The trust agreement outlines the terms and conditions of the trust, including the rights and duties of the trustee, beneficiaries, and the assets held in the trust.

Common-law trusts use Form 1041 when filing tax returns, and the accounting and legal rules are different from those of statutory trusts. Common-law trusts offer increased privacy and security similar to statutory trusts, but they are more advanced in nature and were once only suited for high-net-worth individuals and family offices.

One of the primary benefits of common-law trusts is increased privacy and security. Unlike statutory trusts, common-law trusts are not required to be registered with the state, which means they are not part of the public record. This helps to keep your financial affairs confidential, and it makes it difficult for third parties to access your financial information.

Another benefit of common-law trusts is advanced tax planning. By creating a common-law trust, you can transfer assets to the trust and take advantage of tax benefits, such as deferring capital gains taxes, reducing estate taxes, and avoiding probate. Additionally, a common-law trust can provide asset protection, which can shield your assets from creditors and lawsuits.

Common-law trusts also offer flexibility and control. As the creator of the trust, you can specify the terms and conditions of the trust, including who can receive distributions, how much they receive, and when they receive them. This allows you to maintain control over your assets even after you transfer them to the trust.

Despite the benefits of common-law trusts, there are some potential issues to consider. One of the main drawbacks is the expense of setting up and maintaining the trust. Compared to statutory trusts, common-law trusts can be more expensive to establish and require ongoing administrative and legal costs. It can also be difficult to find experts who are well-versed and able to speak on common-law trusts.

Another issue is the complexity of the legal and accounting rules. Common-law trusts are a more advanced tool, and the rules and regulations are more complex in nature than those of statutory trusts. Therefore, it's essential to have experts who are well-versed in structuring and operating this type of trust.

Common-law trusts were once best suited to high-net-worth individuals and family offices who were looking for an advanced tool for wealth preservation and tax planning. Today, anyone looking to protect their assets and build and create wealth should consider a common-law trust. If you plan on having significant assets and are concerned about preserving your wealth and minimizing taxes, a common-law trust may be an excellent option for you.

Common-law trusts are an advanced tool for wealth preservation and tax planning. They offer increased privacy, security, and advanced tax and estate planning benefits, making them an excellent option. However, the benefits of common-law trusts outweigh the costs, especially for those who are concerned about preserving their wealth and minimizing taxes.

If you're interested in setting up a common-law trust, it's important to work with experts who are well-versed. They can help you navigate the legal and accounting rules and ensure that the trust is set up correctly and administered appropriately.

I can't help but mention, you do not have to be wealthy to start a trust. Setting up a trust is a smart decision for anyone who wants to protect their assets and plan for their financial future, especially small businesses. With the right experts, you can place your business and any other assets you own inside of a trust and the cost of setting up a common-law trust can be more manageable than you might think.