Trust Funding and Selling Your Business

What Your San Jose Estate Planning Attorney Needs You to Know about Selling Your Business and Funding Your Trust –
As baby boomers continue to age, our San Jose estate planning attorneys often see large amounts of wealth transfer from one generation to the next. Often, this wealth comes from closely-held family businesses. When an owner sells this type of business, they generally intend that the money they make from the sale will go toward supporting them and their family for the foreseeable future. 

Unfortunately, tax burdens can be so high that the plans won’t come to fruition in the way that the seller hoped. If there are no estate plans in place, you will face a 40 percent federal estate tax rate for any sale proceeds that exceed the exclusion amount that you transfer to your heirs. However, estate planning attorneys can use trusts to help save on both estate and income taxes on the proceeds from your business sale. Two commonly used methods are grantor retained annuity trusts and charitable remainder trusts.

Grantor Retained Annuity Trusts (GRATs)

A GRAT is a trust into which you can transfer assets, such as proceeds from a business sale, and then receive yearly annuity payments over a set number of years. At the end of this fixed term, the GRAT’s remaining assets pass on to the designated beneficiaries of the trust. It is possible to structure a “zeroed-out” GRAT in a way that the gift made to the beneficiaries will be minimal. Because the annuity payments return the original value of the assets to the grantor, appreciation in the trust’s assets that exceeds the IRS assumed rate of return would eventually be a tax-free gift when the assets pass to the beneficiaries.

In order for a GRAT to be effective, the assets held within it must grow faster than the IRS’s assumed rate of return. Furthermore, the grantor must outlive the term of the GRAT so that its assets do not revert to the grantor’s estate. The mortality risk can be mitigated through the use of a “rolling GRAT” strategy, which employs a series of short-term GRATs.

Charitable Remainder Trusts (CRTs)

If the sales of your business greatly exceed your family’s financial needs, you may wish to put some of the proceeds toward achieving charitable goals. In such instances, you may want to consider contributing a portion of the assets to a CRT. The gift you make will be subject to your retained interest either in an annuity payment or a yearly payment of a fixed percentage of the market value of the assets within the CRT. Assets that remain in the CRT at the end of its term will pass to a charity of your choosing. 

The benefit of a CRT is that it helps save on both estate taxes and income taxes. For maximum tax savings, you will need to transfer the interest of the company into the CRT before you acquire a right to the income from a specific sale of the company. 

Contact a San Jose Estate Planning Attorney

If you are in the process of selling your business, it is important to speak to an experienced San Jose estate planning attorney. They will help you ensure that a more significant proportion of the proceeds will go toward the intended beneficiaries rather than to taxes. If you need assistance, we are here to serve residents located throughout the state of California. To schedule an appointment at one of our offices, contact (800) 244-8814.

If you have any further questions about asset protection planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at our California asset protection office at 800-244-8814 to set up a consultation.