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The Trusts SMB Owners Use to Avoid the 40% Death Tax ๐ชฆ
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"How the f**k am I supposed to know something like that? No one tells me these things." ๐ก I have some version of this conversation at least once a year with different clients. There's nothing entrepreneurs hate more than feeling like their competition or their buddies have an edge on them - including tax efficiency. So when someone tells them that they're doing "XYZ," the immediate response is "why didn't my guy tell me that?" The answer is one of three things - it's not the right thing to do for efficiency (different facts), it's not the right time to do it (different life phase), the buddy is an idiot. ๐ These are not mutually exclusive in my experience. One of the places this happens most often is in estate planning - creating different types of trusts to care for and steward the wealth you've created. So today, we're taking on estates and trusts 101 for business owners. Caveat that there are professionals way more qualified than I am for trust planning - and you should engage them for advice tailored to your scenario. What follows is only meant as educational, informational, and entertaining content. I view tax planning through a "phase of life" lens. ๐ญ What you need to implement is as important as when you need it. Accordingly, we'll work through this in a most-common life phase approach. Starting Out / Pre-RichFor a good chunk of the 20s-30s, many entrepreneurs will be building and living on meager streams of income to sustain their life. Some will lever up and flex with maxed out credit - but the people building valuable enterprises that will need real estate planning will not. For many, success may not happen with the first thing they do, so at this point optionality is key. You don't want assets tied up in a web of complicated trusts that you end up needing to unwind. That is a waste of money and time. So the starting point for someone wanting to do some trust planning at this phase is considering a Living Trust. Think of a Living Trust as like a disregarded entity for your personal assets (if any exist). A Living Trust doesn't offer any estate tax benefits (we'll get there), but it can alleviate a huge burden of probate if you die unexpectedly. ๐ You still get taxed on the income from assets in the Living Trust, but it streamlines the probate process for your estate after your passing - a job usually dropped on an un-expecting loved one who has enough to process. Common things you'll see in this Living Trust are things like brokerage accounts, crypto, one-off rental properties, and other types of personal assets (jewelry, collections). Living Trusts should evolve as your estate plan gets complicated - read: you build more wealth. So these aren't permanent unless you never build substantial wealth. Some Wealth / Not F-U Money Yet ๐The trick to really good estate planning is to know when you're about to hit it big in a year or two. It's a challenge and not always predictable. But if you can time it right, you can save a ton in estate tax. Usually at this point, you've found something that works and you can see the compounding happening. You also see a liquidity event on the horizon - raising equity, IPO, exit, lever-up, etc. In this phase, trusts become most useful in avoiding the estate tax - which is 40% of the value of the estate in excess of $13.99 million per person. Married couples get 2x that - so anything over $28 million is at risk. As well, this amount is set to reset to $7 million based on current tax legislation in 2026. ๐ซจ The trusts most commonly used here are Irrevocable Trusts. These trusts allow for the taxpayer to "gift" assets to the trust and avoid estate tax on the appreciation. This gifting is a complex process and should be well documented with estate and trust attorneys. But it can help avoid the 40% tax on any appreciation of those assets. As well, under current law, the income produced from those assets can still taxed to the grantor (giver) and allows for extra-compounding of value to the trust since it isn't paying it's own taxes. Note that not all Irrevocable Trusts are default "grantor" trusts - so choosing the right trust for your scenario is critical (engage a professional). What kind of assets you put in these Irrevocable Trusts also depends - ideally you contribute low value, high potential assets that will increase in worth over the remainder of your life. Creative structures exist to contribute partial ownership of your SMB, real estate, ranch, and other property. Also worth noting that this isn't a one-and-done set-up. Many trusts are denoted with the year of the gift - so as you continue to build and create new avenues of wealth, new trusts may be appropriate. 1๏ธโฃ โถ๏ธ 2๏ธโฃ โถ๏ธ 3๏ธโฃ FYI - new episode of Today in Tax Court dropped and touches on funding trusts, valuations of businesses, and strategy:
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Strategic Funding / Trade-offsThe goal in tax is matching. And when funding the trusts (actually contributing assets to them), it is more strategic to move those assets when values are depressed (a la the current stock market), or severely discounted (a la early-stage companies). This is because you get more bang for your buck against the lifetime exemption ($13.99 million we mentioned) - assuming those asset values do improve. Some other things to consider in your estate plan:
โ Final words - this is just an overview. But hopefully it helps conceptualize how timing comes into play with trusts. We also do have legislation being written that could change that estate tax cliff happening in 2026 - but until law is passed, it's not the law. If you have more questions or specific scenarios, I encourage you to pay for the help and work with a solid estate attorney. ๐ซก ๐ฅ Hottest Finance Posts This Week ๐ฅโ
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