Estate Planning Blog

For Business Owners: Unveiling Opportunities and Pitfalls of Business Trusts

Entrepreneurs often seek robust mechanisms to safeguard assets and navigate liability in the intricate landscape of business ownership. Enter the realm of business trusts—a lesser-known yet powerful tool entrepreneurs can leverage to secure their ventures. Based on SmartAsset’s article, “What Is a Business Trust and How Does It Work,” we’ll look into the intricacies of business trusts, uncovering their nuances and exploring their potential advantages and drawbacks.

Decoding Business Trusts: A Primer

At the heart of business trusts lies a fundamental premise: the delegation of authority to manage a beneficiary stake in a business. Functionally akin to individual or family trusts, business trusts serve as legal instruments facilitating asset management on behalf of the grantor.

A business trust holds the rights to an individual’s stake in a business entity. In a sense, the trust, as a legal entity, owns the business. With the potential to shield against taxes and liability, business trusts offer a compelling avenue for entrepreneurs seeking robust asset protection.

Understanding the Mechanics: How Business Trusts Operate

Creating a business trust typically starts with deliberations between involved parties and a trust lawyer. This legal instrument, a declaration of trust, formalizes the terms governing the trust’s operation.

Central to the trust’s dynamics is the fiduciary duty entrusted to the trustee—the individual responsible for managing the trust’s assets in the best interests of beneficiaries. This fiduciary obligation underscores the trustee’s paramount responsibility to act prudently and diligently.

Exploring Business Trust Varieties: A Spectrum of Options

Just as individual trusts come in various forms, business trusts exhibit diversity in structure and function. Here’s a breakdown of the primary categories:

• Grantor Trust Characterized by the grantor’s control over trust assets and taxation, this trust type offers a self-contained framework for asset management.
• Simple Trust Operating under IRS verification, this trust directly distributes profits to beneficiaries without accessing principal assets.
• Complex Trust Offering greater flexibility, this trust type permits partial distribution of profits and contributions to external entities, such as charities.

Pros and Cons of Business Trusts: Weighing the Considerations

While business trusts present enticing benefits—from liability protection to enhanced privacy—they pose certain challenges. Here’s a snapshot of the pros and cons:

Pros:

• Liability Protection: Shields beneficiaries from individual liability, akin to LLCs or corporations.
• Privacy Enhancement: Offers an additional layer of privacy in asset management.
• Flexible Distribution Terms: Facilitates tailored distribution schedules for beneficiaries.

Cons:

• Cost and Complexity: Establishing and maintaining a business trust can be expensive and legally intricate.
• Legal Compliance Challenges: Navigating legal requirements and compliance hurdles can pose significant obstacles.
• Lifetime Limitations: Business trusts are typically constrained by a maximum lifespan of 99 years, limiting multi-generational arrangements.

Steps to Establishing a Business Trust

If you’re considering a business trust, the journey begins with competent legal guidance. Collaborate with a trust lawyer to navigate the intricacies of trust creation and ensure alignment with your business goals and objectives.

While establishing a business trust entails upfront costs and legal complexities, the potential benefits of asset protection and operational flexibility can be substantial. Before proceeding, it’s crucial to weigh the key considerations and assess the suitability of a business trust for your unique circumstances.

Business Trusts Key Takeaways:

• Early Consultation is Key: Engage with a trust lawyer early in the process to navigate legal complexities and ensure alignment with your business objectives.
• Deliberate Consideration is Essential: Thoroughly assess the pros and cons of a business trust, weighing factors such as cost, complexity, and compliance.
• Tailored Solutions Yield Optimal Results: Customize your business trust to align with your unique needs, leveraging its flexibility to achieve optimal asset protection and operational efficiency.

Conclusion

Ready to embark on your journey towards enhanced asset protection and operational flexibility? Schedule a consultation with a seasoned trust lawyer today and explore the transformative potential of business trusts.

Reference: SmartAsset (April 19, 2023) “What Is a Business Trust and How Does It Work”

Three Estate Planning Strategies You Might Not Know – but Should – SPATs, SLATs, and DAPTs

In estate planning, where uncertainty seems to be the only certainty, it’s time to adapt and choose flexible strategies so you can walk this changing landscape confidently. This is a different world where individuals don’t just move assets into an irrevocable trust to avoid taxes and sigh with relief. As we age, economic uncertainty and rising costs move the goalposts closer to home. Comprehensive estate plans encompass retirement, advance care planning and Medicaid.

The estate tax exemption, poised to drop significantly in 2026, has estate planning attorneys and their clients considering different approaches to estate planning. Estate planning needs for wealthy individuals and those building a nest egg have evolved from passing on wealth to preserving and accessing wealth retirement through the senior season of life. Referencing Charles Schwab’s article, “Prepare for 2026 Estate Planning With SPATs, SLATs, and DAPTs,” we outline three types of trusts that might be good options in your estate plan.

Trusts, an estate planning staple, have benefits and vulnerabilities if not structured strategically. Adjusting a trust’s provisions to empower trustees with control over distributions protects against creditors or the deceased’s ex-spouse. There are three types of trust you might not be aware of: a Domestic Asset Protection Trust (DAPT), a Special Power of Appointment Trust (SPAT), and a Spousal Lifetime Access Trust (SLAT).

Three Types of Trusts that Add Additional Asset Protection – DAPT, SPAT, and SLAT

Domestic Asset Protection Trust (DAPT)

The Domestic Asset Protection Trust (DAPT) is a self-settled or self-created trust that can name the creator/grantor as beneficiary and an administrative trustee with approval authority. Placing asset distribution decisions in the trustee’s hands provides protection from creditors or litigation.

As with any estate planning option, consider the pros and cons of creating a DAPT. The trust creator or grantor funds the trust but only accesses the assets as the beneficiary, not directly. The administrative trustee controls distributions, while the trust creator is the investment trustee, managing the investments in a DAPT trust.

Special Power of Appointment Trust (SPAT)

Not a self-created trust, the special power of appointment trust’s assets are not vulnerable to creditors or estate expenses. The grantor or person funding the trust is not a trustee or a beneficiary and relies on a trusted individual to distribute funds directly to them later.

Work with an experienced estate planning attorney to discuss the pros and cons of this type of trust. If you don’t need direct access to the funds, a SPAT may align with your asset protection goals.

Spousal Lifetime Access Trust (SLAT)

A Spouse Lifetime Access Trust (SLAT), available in community property states, allows a spouse to establish a trust for the other’s benefit. SLATs are post-marital legal documents that separate community property such as real estate, income, and debt. They can be created by one or both spouses and funded with different assets to remove specific property from one spouse’s estate.

Work with an estate planning attorney if you are interested in a spousal lifetime trust so you don’t run into a reciprocal trust doctrine issue, in which the trusts are too similar and create mutual value, much like the community property they’re trying to avoid.

Customize each trust’s provisions to avoid similarities that make both trusts interrelated or like community property. Each SLAT should differ in trustees, beneficiaries, trust administration rules, gift distributions and withdrawal rights.

Estate Planning Trust Strategies to Know Key Takeaways:

• Trust Strategies to Know: Consider a DAPT, SPAT, or SLAT in your estate plan.
• Trust Pros and Cons: Each has benefits and considerations before choosing your trust type.
• Build Flexibility into Estate Planning: Economic uncertainty and changing needs mean more flexibility in today’s estate planning.

Conclusion

Estate planning today means adding more flexibility in uncertain times. With SPATs, SLATs, and DAPTs, individuals can adapt their estate plans to address goals and economic changes for peace of mind from retirement to senior years.

Reference: Kiplinger (April 12, 2023) “Prepare for 2026 Estate Planning With SPATs, SLATs and DAPTs.”

Why are Retirees Selling Their Forever Homes?

With the residential real estate market at an all-time high, it seems like a no-brainer for retirees to put their homes on the market, capture the equity in their homes and downsize to a less expensive home. Before you call a realtor, there are a number of factors to assess, advises an article from NerdWallet, “Selling Your Home Could Boost Your Nest Egg—But Is It Worth It?”

Selling high is great, especially if you own a home in an expensive area and your plans include a smaller home in a less expensive market or even renting. However, can you afford to purchase a replacement home to suit your current and future needs? A rising tide lifts all ships, and prices for all homes, even modest ones, have risen.

If relocation is on your agenda, a thorough analysis of property taxes and basic costs of living should be part of your planning. While the recent settlement of a class action lawsuit against the National Association of Realtors may mean you’ll spend less on selling and buying a new home, property taxes only go in one direction: up. If purchasing a new home means a new mortgage, interest rates have continued to increase, and for the time being, money is not as cheap as it was a few years ago. A mortgage payment on a smaller house could be the same as the mortgage payment on a larger house purchased before interest rates began rising.

Consider the non-financial aspects of selling your current home to move to another city. For some people, moving to a golf community is a great thing. However, when there is no family nearby, the death of a spouse can mean a return to their previous hometown, regardless of the cost.

The cost of maintaining a pre-retirement home in a region where all the children have left the nest can become overwhelming for fixed-income budgets. An older home will need a new roof, landscaping services and the inevitable replacement of major appliances.

Before you make the final decision, after considering the costs of selling your current home, buying a new one, or living in another community, you may also need to change medical providers. Do your homework to be sure you will be able to receive the same quality of care you require in your new community.

Don’t underestimate the impact of climate in your ideal location. Suppose you’re planning to relocate to Florida or Arizona. In that case, you’ll want to visit for an extended period during the worst seasons, when it’s hot and stormy in Florida and over 110 degrees and dry in Arizona. It’s great to visit Maine or the Upper Peninsula of Michigan in the summer. However, winters there are long and cold. Be realistic about what kind of weather you’ll want to live with as you and your spouse age.

If you move to a new home in a different state, remember to update all estate planning documents with a local estate planning attorney. The rules for many documents, including Power of Attorney, Last Will and Testament, Advanced Care Directive, Healthcare Proxy and others are different from state to state, and a valid will in one state may not be valid in your new state.

Reference: NerdWallet (March 21, 2024) “Selling Your Home Could Boost Your Nest Egg—But Is It Worth It?”

How Parents and Adult Children Talk about Money and Aging

If you thought it was hard to talk with your children about sex, try talking with them about money and death. Americans generally steer clear of talking about death and money. Nevertheless, these conversations are necessary, according to a recent article, “Let’s talk about money and death: Why aging parents and their adult children should have ‘the talk,’” from MarketWatch. Sharing information about finances and end-of-life wishes can prevent resentment or stress before a crisis and gives everyone involved peace of mind.

If an estate plan has been created and financial and tax planning accomplished, but the adult children aren’t told a plan exists, there may be general worry over decades as parents age. What will happen when they die? Will the siblings know what to do? Who will be in charge? A family meeting to discuss the plan and the parents’ wishes can address these issues.

This is especially important for members of Generation X (Americans born between 1965 and 1980). This cohort has the most assets, may deal with a significant wealth transfer and often cares for its children and aging parents.

Start by putting together an agenda for the family meeting. Understand that there may need to be more than one meeting, since there is so much ground to cover. Long-term Care planning, the current status of the parent’s living situation and plans for a possible move to a continuing care facility are just the start. Do the parents have an estate plan and documents like a Power of Attorney, Healthcare Proxy, Advanced Care Directive and the like?

Money can be an emotional conversation, especially if there are disparities in the sibling’s financial status. Parents are often extremely reticent to share information about their net worth, sometimes because they don’t want their children to lose incentive to work, and in other situations because they are embarrassed about not having enough money to sustain them through their later elder years.

Having a neutral third party in the meeting, like an estate planning attorney, can be helpful when emotions are running high. Holding a family meeting in a law office may sound formal. However, having a professional on hand who can clarify estate, financial and tax matters may help keep the conversation focused. If the estate planning attorney works with a therapist or geriatric specialist who facilitates family discussions, they may be able to help the family move past the emotions of anticipated grief into productive, concrete planning.

Confronting the realities of mortality and money is difficult even in the best of circumstances. Nevertheless, with the support of skilled professionals, a focus on care and the creation of a no-judgment zone, the family will be able to help each other as they prepare for the future.

Reference: MarketWatch (March 23, 2024) “Let’s talk about money and death: Why aging parents and their adult children should have ‘the talk’”

Estate Planning has Begun for Exemptions Expirations

The high lifetime estate and gift tax exemptions gave extremely wealthy Americans terrific tax breaks. In 2024, exemptions are currently at $13.61 million per person and $27.22 million for married couples.  However, the end of these levels means that taxpayers with wealth of a much lower magnitude will need to prepare, according to a recent article from Forbes, “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset.’”

Some state estate taxes are tied to federal estate taxes, so people of modest wealth should check with their estate planning attorney to be sure they are properly situated before the law changes. In addition, several strategies can be considered and applied to many tax brackets.

Charitable Giving. Instead of making a gift through a trust, you might consider donating cash to a charity. Under the 2017 law, the deductions for direct cash contributions jumped from 50% of AGI to 60%, including gifts to Donor-Advised Funds (DAFs). When the exemptions end, the limit will return to 50%, so if you are charitably inclined, making a cash gift now is a good idea.

Strategic Gifting. Assets depressed in value may have tax value as gifts. You might gift them to a beneficiary or a trust, so their appreciation may occur after they have been removed from your taxable estate. This creates two wins: the depressed assets will use less of your lifetime estate and gift tax exemption, and their future growth and possible increase in value will take place outside of the taxable estate.

“Substitution Powers” Assets. If you have transferred assets to grantor trusts with retained “substitution powers,” consider moving low-basis assets out of trusts at a lower current value in exchange for higher-basis assets of equivalent value. This strategy could lessen capital gains on the lower-basis assets by returning them to the taxable estate and benefit from the step-up in basis at death. Talk with your estate planning attorney about how this might work for you.

Business Owner Planning. The Qualified Business Income (QBI) tax deduction created by the Tax Cuts and Jobs Act allows select pass-through entities, like sole proprietorships, partnerships, and S-corp owners, to deduct as much as 20% of business income. There are income thresholds and other limits to consider. However, this tax deduction ends on December 31, 2025. Accelerating income now could be of great value for business owners who qualify.

Basic Income Tax Planning. Income tax brackets will return to their levels before the TCJA law was enacted. The top bracket may increase to 39.6%, so you may not want to defer income. Middle tax brackets are also expected to expand.

Alternative Minimum Tax and Incentive Stock Options. The exemption amount for the AMT increased under the TCJ. However, this will also return to previous levels, making more taxpayers vulnerable to the AMT. One workaround is to exercise incentive stock options, which aren’t considered income for regular tax purposes but are considered income for AMT taxes. The AMT could be due in the year of exercise. If you can exercise before 2026, it could be a tax-savvy move.

Estate Planning Strategies. Planning needs to be flexible, since there is no way to know if Congress will or won’t act to renew TCJA. It may seem like there’s time to make any necessary changes. However, it takes time to create and execute a plan, which is why wealthy families are acting now to protect their assets.

Reference: Forbes (March 6, 2024) “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset’”