Death and Taxes - Estate Planning and Trust Terms for Your Business

By Jamie D

Successful owners of family businesses know that it's never too early to start planning for the inevitable transfer of ownership. Although it may not seem logical to plan for succession during the prime of your career, detailed and often confusing tax laws make holding off a poor choice.  Advance planning gives business owners time to create an appropriate plan, implement tax-saving strategies, and hopefully make the succession process as efficient as possible.


First things first: You will likely need an attorney who is familiar with your business and the laws concerning transferring business assets.  It is highly recommended that you consult legal counsel concerning this matter because tax laws are constantly changing.


Key Terminology of Estate Planning

Will - A legal document that indicates how to distribute your property after your death. In the event that a person dies without a will, the state of their last residence and its probate courts will determine what happens to that person's estate.

Estate Tax - A federal tax on your right to transfer property at your death.  Estate tax accounts for the fair market value of all assets to establish a person's gross estate.  After accounting for all deductions on the gross estate, the person's taxable estate is combined with all lifetime taxable gifts to calculate your estate tax.  This figure is reduced by the unified credit which presently makes only estates in surplus of one million dollars taxable.

For more information, check out the IRS's Frequently Asked Questions on Estate Taxes.


Gift Tax - A federal tax on the transfer of property (including money) from one person to another while receiving nothing or less than full value in return.  Gift tax applies to all property regardless of whether or not that property was intended to be a gift or not.  Gift tax is generally paid by the giver and is required for all gifts in surplus of the annual exclusion for each calendar year.  The current annual exclusion for an individual is $13,000 per person, per year and $26,000 per person, per year for each married couple.

For more information, check out the IRS's Frequently Asked Questions on Gift Taxes.


Probate - A legal process of administering a deceased person's estate by filing their will, appraising property, paying all debts, and distributing their remaining assets and property under the will. Probate is often costly and time-consuming however many states have simplified probate for estates below a certain amount. The amount required for expedited probate varies among states but under these conditions the process is faster and less expensive.


Trust Options

As a business owner, you will face gift taxes if you give percentages of your business to dependents during your life time. If you leave your business to dependents in a will, they will face estate taxes upon your death.  By transferring portions of you business ownership and value into trusts, you may be able to limit the amount of taxable property when passing on your business.  Common trust options include:


Living Trust - A living trust is created to hold assets for the donor's use during their lifetime and transfer property (outside the creator's will) to a designated beneficiary upon their death.  Living trusts are often created to minimize taxes and secure financial property but most importantly, to avoid probate.  Because the living trust technically owns all property and assets, they are not subjected to probate that would affect property and assets in a normal will.


Marital Deduction Trust - Created in a person's will or living trust for the benefit of their spouse at their death. Property placed in a qualified marital deduction trust is not subject to federal estate tax at your death.  There is no limit on the amount of property, including all business assets, that can be transferred between spouses in the event of one spouse's death. All tax that would have been imposed is then assessed when the second spouse dies.


Unified Credit/Exemption Equivalent Trust - Created in a person's will or living trust for the benefit of a designated beneficiary.  This trust is funded with the maximum amount of property, generally $600,000, that can be left to a beneficiary while avoiding federal estate tax.


Dynastic Trust - Created in a person's will or living trust for the benefit of a person's grandchildren or a third generation beneficiary.  This trust is funded with the maximum amount of property, generally $1,000,000, that can be given while avoiding the federal generation-skipping transfer tax.