Your business is your family's largest asset. When you sell it, the proceeds become your family's largest target, for estate tax, creditors, divorce, and lawsuits. Trust strategies exist to protect that wealth, but they must be established before the liquidity event to be effective.
The Estate Tax Exposure
The current federal estate tax exemption is $13.61 million per person ($27.22 million for married couples). Sounds like a lot, until you factor in your business value, real estate, retirement accounts, and life insurance. Many business owners are surprised to find they're well above the exemption threshold.
And the exemption is set to drop by approximately half after 2025 under current law (the Tax Cuts and Jobs Act sunset). If Congress doesn't act, the exemption could fall to roughly $7 million per person.
Key Trust Strategies
Irrevocable Life Insurance Trust (ILIT): Removes life insurance proceeds from your taxable estate. A $5M policy inside an ILIT passes to your beneficiaries estate-tax-free.
Grantor Retained Annuity Trust (GRAT): Transfer appreciating assets (like pre-sale business stock) to a trust while retaining an annuity. If the assets appreciate faster than the IRS assumed rate (the 7520 rate), the excess passes to beneficiaries gift-tax-free. "Zeroed-out" GRATs are particularly powerful before a known liquidity event.
Spousal Lifetime Access Trust (SLAT): An irrevocable trust for the benefit of your spouse. You remove assets from your estate while your spouse retains access. Useful for business owners who want estate tax reduction but aren't ready to give up control entirely.
Intentionally Defective Grantor Trust (IDGT): An irrevocable trust that's treated as owned by the grantor for income tax purposes but removed from the estate for estate tax purposes. You can sell assets to the IDGT in exchange for a promissory note, freezing the estate value at the sale price while future appreciation occurs outside the estate.
Timing: Before the Sale
Most trust strategies are dramatically more effective when implemented before the business increases in value or is sold. The reason is simple: you want to transfer the asset at its current value and let the appreciation occur inside the trust, outside your estate.
Transferring pre-sale stock to a GRAT at a $5M valuation, and having it sold for $20M inside the trust, removes $15M in appreciation from your estate. Transferring post-sale cash at $20M doesn't create the same benefit.
California Trust Residency
California taxes trusts based on the residency of fiduciaries and beneficiaries, not just where the trust was established. A trust with a California trustee or California beneficiaries may be subject to California income tax on all of its income, even if the trust was created in another state.
We evaluate California trust residency rules on every trust engagement, because the state tax impact can significantly affect the net benefit of the strategy.
Trusts are not just for the ultra-wealthy. They're for anyone whose estate, including business value, real estate, retirement accounts, and insurance, might exceed the exemption. And with the exemption potentially dropping after 2025, the planning window is closing.
This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Business owners should consult qualified tax and legal advisors before entering into a transaction.
