In this 30-minute webinar, subject matter experts Nate Nelson and Brett Larson examine under what circumstances a trust can prove beneficial or detrimental for an organization. This post will look at the various trusts discussed in the webinar (link at bottom).
Business Management Trusts
Business management trusts are for the business owner who is not ready to make a major change in ownership during his or her lifetime. There are three types of business management trusts:
- Lifetime Revocable Trust: This is for the reluctant business owner who is senior in years and may or may not have obvious candidates on to which to pass the business. This owner does not want to sell the business, but is rather looking for a legacy to perpetuate the business once he or she has passed. The advantage of this technique is that if the owner is not able to act, he or she has already identified the next decision-maker.
- Testamentary Trust: This trust is for the business owner who can’t even imagine making a succession decision is his or her lifetime. It is sometimes referred to as a will trust or trust under will. The trust becomes operative upon the death of the owner, resulting in a shareholder trustee being appointed for major decisions, a Board for the organic decisions, and officers for the day-to-day decisions.
- Irrevocable Trust: The person who says I’ve had enough right now and is ready to part with the business, but is not ready to give beneficiaries control, should consider an irrevocable trust. The irrevocable trust is removed from the owner’s estate, which would potentially have estate planning benefits. This trust would mirror the techniques of the testamentary trust for the owner, but only during their lifetime.
IDIGT and IDGT
The Intentionally Defective Irrevocable Grantor Trust (IDIGT) is the star of the family transfer. It is for the owner who is ready to part with equity, but not with control. What happens is that there is a transfer of the business to a trust where the owner’s children would be the beneficiaries; all at no tax.
Some of the impediments to making a sale of a business to a child are if you’re unsure whether or not you’re going to get your value, the children are not in a position to pay for the business, and the children aren’t ready to receive the interest. If this is true, then an Intentionally Defective Grantor Trust (IDGT) would be created, wherein the owner would gift 10 percent to the trust, and sell the remaining percentage to the trust in return for a promissory note.
CRT and CLT
The Charitable Remainder Trust (CRT) works best when the goal of the seller (owner) is to gain access to retirement or annual income from asset while diversifying and significantly decreasing his or her tax burden. Ultimately, the owner benefits through tax deferred growth and reducing capital gains taxes to 15 percent versus 23.8 percent federal.
An owner will choose a Charitable Lead Trust (CLT) if he or she wants to avoid income or capital gains tax on a portion or all of the proceeds that are to be left for future generations only; he or she wants to avoid estate tax on that ultimate transfer. Tax benefits include no tax on gifted portion of stock, income tax charitable deduction in year of transfer, and reduction of gift or estate tax on ultimate gift to non-charitable beneficiary.
For more information, we advise contacting a corporate attorney such as Nate Nelson or Brett Larson from Messerli & Kramer.
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The webinar Trusts for Business Owners can be found here.