As a small business owner you run the constant risk of losing everything - your business; your furniture; your life savings; your home; and often your marriage. We're so busy fighting in the trenches each day that we often don't see the wood for the trees. There is a superb method - entirely legal - of protecting the most important stuff in your life. And this technique, singly, is responsible for most of the success we have when helping people through a business setback. In fact, it is so important that we no longer even try to bail out folk who haven't done this - because it's a waste of time. They're going to face 5 years of intense pain, and there is almost nothing that anybody can do at that point.

This simple method of protecting your stuff is called a trust. It's a very old legal structure, which dates back to medieval England when landowners faced the loss of their property in taxes - so they devised this nifty idea. Why not entrust ownership of the land to the Church, and have the Church look after it for them? This way they got all the benefits of the land without the burdens of ownership. Since then, trusts have become an established legal concept in most English speaking countries - including South Africa.

The problem is that trusts have taken a bad rap because accountants started using them a while ago to evade taxes. Since then the government has kept a keen eye focused on trusts - and especially the use of trusts to reduce your tax burden. But the laws regarding the protection of assets in a trust haven't changed much in decades. That makes a trust a remarkably useful device to legally hide your life assets.

We each spend inordinate amounts of money to achieve this same protection goal. We buy life assurance to cover our families and to cover the probable death duties [estate tax]. That's a monthly expense for the rest of your life - and doesn't help at all if your business fails in the meantime. But the setting up of a trust eliminates much of the need for life assurance.

Or we structure our wills to ensure that everything flows into a trust on our death - but in so doing we incur the death duties again, as well as the risk that our business creditors will attack our estates and wipe them out leaving nothing left to actually put into the trust! On top of that it often takes up to a year to rearrange everything so that it works correctly. Yet, absolutely nothing stops us from setting up that same trust now [cheaper] and getting it working immediately so that we can be confident that the minor inconvenience of death will not stop our families from operating as an economic unit.

Interestingly, we tend to think that trusts are only for rich folk because they have so much to protect. But that's nonsense. The less you have, the more you need to protect it. Richer folk typically can recover from a business failure much faster than poorer people. But if you're already struggling somewhere close to the bottom of the economic pile, how much more important isn't it to secure what you have before it gets worse?

Whatever business success I have had over the past few years is the result of my owning nothing, but having everything neatly structured into trusts that will survive my death or future disaster. If I'd listened to my accountant 10 years ago regarding trusts ["Don't do it because they're not tax efficient."] I would still face disaster every time I made a wrong decision. That's no longer an issue.

Without exception, every one of the many success stories of people surviving complete, catastrophic business failure has involved a trust. Don't listen to anyone who says they don't work. They're wrong. I am living proof of that. Asking someone who doesn't have a trust about the benefits of a trust is like asking a genetically blind person to describe the colour green! And asking your bank about trusts is like asking a wolf for advice on protecting sheep.

You form a trust, typically, by briefing an attorney. [Briefing is an expensive word that means telling an attorney your details.] S/he drafts a trust deed [a short novel in which you and your family feature] and this is registered with the local High Court. Once registered the trust operates as a separate legal entity. And the mere fact that you have a trust immensely complicates the life of anyone trying to attack you. Trusts have a pragmatic value far above their legal value. Most folk will give up the attack as soon s they find out about the trust - because it confuses the issues so much. And it costs a lot of money for the attacking attorney to sift through the issues. Which means that most folk will walk away. The legal value kicks in when you have a large creditor who has the funds and the will to attack you.

Is it complex? I don't think so. It's a bit like my car - a simple cover hiding some very complex systems. Yet when I turn the key and the engine bursts into life, do I ever worry about the complexity? Not really. Every 15,000 KM I have the car serviced. That's what you do with your trust as well.

For what it's worth, I have 3 trusts. The first contains all my family assets - furniture, savings, books - the emotional stuff. This protects it all from any business setbacks. The 2nd holds the shares of all the firms I am involved with. This protects them from business setbacks, as well as protecting the growth from tax. And the 3rd holds all the business assets - the computers, databases, equipment. This protects these assets from any individual business failing, as well as protecting the growth. It also buys some flexibility when I want to sell any of the businesses. Since setting them up the costs have more than justified the benefits.

© Peter Carruthers, www.petesweekly.co.za

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