How Estate Planning Trusts Can Minimize Taxes for the Exiting Entrepreneur

February 12, 2020
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Contrary to popular belief, a will is not always the ideal solution in an estate plan. This is especially true when it comes to entrepreneurs and business owners with more complex assets at stake. There may be distinctions between what your heirs are to receive and what happens with your business.

We’ve talked recently about estate planning for business owners and how to develop a strong succession plan. Now, we want to talk about living trusts as an alternative to or in conjunction with a traditional will and testament. A trust may be the best option for you, your family and your business.

Trusts vs. Will

A will requires a probate process that can take more time and cost a lot of money in legal fees. Probates are also public record, which denies your family certain rights to privacy. Then, you have estate taxes that can take a big chunk of money away from your heirs when all is said and done. Also, a will only takes effect after you pass. What happens if you are in an accident or develop a debilitating illness that leaves you physically or mentally incapacitated? In these situations, the court can actually take control of your assets before you die and that can be costly to both your heirs and your business.

A trust can be a beneficial part of your estate plan for many reasons. It will allow you to better control your assets while you are living (even if you are incapacitated) and after you die. Trusts can also protect your business and your family from a significant amount of probate costs. Basically, a living trust will give you a lot more control and flexibility than a standard will.

Let’s take a look at a few examples of trusts you might want to consider:

Grantor Retained Annuity Trust (GRAT)

With a GRAT, an irrevocable trust is developed for a predetermined period of time. A business owner would contributes assets like their company stock into the trust but retains a right to receive (over the term of the GRAT) the original value of the assets contributed to the trust while earning a rate of return as specified by the IRS (known as the 7520 rate). When the GRAT’s term expires, the leftover assets (based on any appreciation and the IRS-assumed return rate) are given to the grantor’s beneficiaries. The appreciation that occurs once in the trust pass tax free to your heirs.

Charitable Trust

Charitable trusts are typically great tax shelters. You would sign over a set of financial assets to establish a charitable foundation. There are two basic types of charitable trusts, including lead trusts and remainder trusts. A remainder trust will provide you with an income stream for a specific period following which your assets will be distributed to the charity after the term of the trust ends. A lead trust will give you more control over your assets down the road while the charitable organization receives annuity like distributions over a specific term.

Exemption Trust

A married couple can save in estate taxes by establishing an irrevocable exemption trust. This trust holds the assets for the first member of the couple to die, thus removing assets from the grantor’s taxable estate and reducing tax liabilities for the surviving spouse.


There are many different types of trusts and estate planning strategies out there. Make the right decisions and develop an estate plan that is best for you, your family and your business. Illumination Wealth is here to help with all your estate planning needs. Contact us today to schedule a no-obligation estate planning consultation.