Sunday, August 22, 2010

Sale of Closely Held Businesses to Defective Grantor Trusts

Owners of closely held businesses can benefit for tax purposes with the sale of the business to an intentionally defective grantor trust.  This is one of the most effective techniques to freeze the value of the business owner's estate and transfer the future appreciation of the business to future generations of heirs of the taxpayer. 

Due to current economic conditions and the lowest interest rates we have seen in a long time, now is the time to consider the technique of selling assets to an intentionally defective grantor trust, and take advantage of a tremendous wealth transfer opportunity.  It is almost a certainty that the estate tax will come back in some form next year.  If current law does not change, we will have a maximum estate tax rate of 55% and a life-time exclusion of $1,000,000.  If this comes to pass, this will be the highest estate tax rate we have had in ten years.  

To properly utilize this technique the deal must be structured properly.  The trust document created must intentionally violate one or more of the grantor trust rules, the grantor must not retain any powers that would cause inclusion in their estate, and the document must ensure that the dispositive scheme created by the grantor is successfully created paying particular attention to extending the duration of the trust to as many future generations as possible.

The end result will be a trust that is treated as owned by the grantor for income tax purposes, but not for estate tax purposes.  Thus, removing the business from the estate of the Grantor and transferring future appreciation in the business to future generations.

If you will have a taxable estate in 2011 and own a business, you should give this technique some consideration this year.  It is one of many methods we can use to lower your estate tax bill with the coming return of the estate tax in 2011.  Remember, the estate tax is a tax that we can completely eliminate with proper and timely planning.  Leaving more of your legacy to your family.