Recently, we were meeting with a new business owner client during their comprehensive planning review meeting when the topic of their estate plan came up. When it was highlighted that the federal estate tax of a whopping 40% could be applied to any estate value over $12.92 million as of 2023, they essentially scoffed and said there was no way they would ever meet that threshold.

However, we reviewed what would possibly be included in the value of their estate upon death, which will include the sum of the fair market value of all their estate assets at the time of death including bank and investment accounts, life insurance, real estate and other property including business value. This client is a very successful business owner whose business entity is a limited liability corporation (LLC). The value of the business alone places this business owner well over the estate tax exemption of $12.92 million.

In addition to this business owner having estate tax liability considerations now, we then further highlighted that the current estate and gift tax exemption law sunsets in 2025, and the exemption amount will drop down to the prior law’s $5 million cap (which adjusted for inflation is expected to be about $6.2 million). Now that it was clear the amount of dollars on the table, we agreed coordinating a planning project with the client’s advisory team was going to be the focus over the next 6-12 months. We evaluated the various options and ultimately determined that funding an irrevocable gift trust with a portion of discounted value of the business was the optimal strategy to take advantage of this estate tax exemption and reduce the size or value of their estate.

A trust is a fiduciary relationship in which property is held by one or more people for the benefit of one or more people. It is also a separate legal entity in which a court maintains no control over the assets placed in the trust. A Trustee is someone responsible for administering the terms of the trust on behalf of the beneficiary or person who will receive the benefit from the trust, usually in the form of income or property.

In more simple terms, imagine a trust being a private box of hidden treasures by which you could place assets such as money, property or even businesses inside of that would now receive protection and take advantage of certain allowable exemptions that otherwise would not be available to you.

Trusts can be a good way to reduce the size of your estate thereby reducing the potential estate tax burden, while also avoiding probate (the lengthy legal process in which a will is reviewed and administered), maintaining privacy, and protecting assets from creditors.

Due to the fact that closely-held business interests such as sole proprietorships, S-corps, partnerships, and LLCs are included in the total value of your gross estate it can be a worthwhile endeavor to understand the benefits of gifting and assigning the value of the business to a specialized irrevocable trust, thus reducing your overall estate value and potential tax burden upon death.

In this client’s case, gifting business interests to this irrevocable gift trust removed not only the value of the interests from his taxable estate for federal estate tax purposes, but also removes any subsequent income and appreciation related to those interests. The impact of this significant lifetime gift for transfer tax purposes was based on the value of the asset as of the date of the transfer and was able to utilize minority non-voting interests at a discounted value. Overall, implementation of this strategy was projected to save the family millions in future estate taxes.

Every business owner is unique and requires detailed and complex planning with a capable and experienced advisory team. While this scenario involves gifting minority interests to an irrevocable gift trust, there are often many considerations to evaluate. Some examples include Grantor Retained Annuity Trusts (GRATS), Grantor Retained Unitrusts (GRUTS), Installment Sales, Charitable Trusts, just to name a few.

These are just a few examples of different types of trusts that can be leveraged to take advantage of certain exemptions. If you have questions concerning the applicability and establishment of trusts to you as a business owner, please don’t hesitate to contact a member of the Saling Wealth Advisors team.

This material is not financial advice or an offer to sell any product and is not a recommendation to buy or sell any particular security. The opinions expressed are those of the Saling Wealth Advisors’ Management Investment Team and are subject to change without notice.

Saling Wealth Advisors (“SWA”) is an independent SEC registered investment advisor. Registration does not imply a certain level of skill or training. This material is provided for informational and educational purposes only. More information about SWA including our advisory services, fees, and objectives can be found in our Form ADV Part 2A, which is available upon request.