A trust is a legally recognized entity that is established when a grantor confers the right to hold title to property or assets to a trustee for the benefit of designated beneficiaries. Trusts are commonly utilized to safeguard assets for both individuals and businesses. In the case of business owners, trusts serve as a protective measure for beneficiaries by preventing potential creditors, including former spouses, from obtaining direct access to assets held within the trust.
Minimizing Estate Taxes
The assets transferred to the trust shall experience growth outside of the estate, thereby rendering all future growth exempt from estate tax, albeit subject to one’s lifetime exemption. To illustrate, suppose a business owner transfers a company valued at $3 million to a trust, and the company eventually sells for $17 million. The transfer to the trust ensures that the increased value is not subject to estate taxes, resulting in substantial savings of up to 40% in the wealth passed on to family members. It is imperative to note that the efficacy of this strategy is contingent on the type of trust employed.
Avoiding Potential State Income Tax
As you prepare for a liquidity event, it is possible to utilize the trust structure to potentially avoid state income taxes on a significant portion of the sales price. Depending on the sale’s structure, your trust can be designed to allow non-state sourced passive income to escape state income taxes, enabling you to retain more of your hard-earned profits. As a discerning business owner, you are constantly assessing your business and the environment in which it operates. Trusts can be a powerful tool that aligns your business with your current and long-term strategic objectives. Trusts can provide solutions to various business-related questions, from revocable to charitable trusts, that business owners can leverage to safeguard their business. It is crucial to work with a knowledgeable wealth advisor to ensure that the solution is appropriate for you before proceeding.
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