I. Introduction
A. The Idea
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- The primary approach used by estate planners to reduce estate taxes is for taxpayers to transfer assets to children or grandchildren (or trusts for their benefit) when assets aren’t worth a lot, so that when they become worth a lot the appreciation is transferred without the imposition of estate or gift tax.
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- The simplest way to accomplish this end for an entrepreneur is to put trusts for the children and/or grandchildren “into” the business from the start. Instead of the parents owing 100% of the business, they can gift cash to trusts for issue and those trusts can invest that cash initially into the business (typically for non-voting interests so that the parents can keep control). Since cash to initially capitalize a business can be nominal, this approach can allow trusts for issue to own a significant share of the business using the $14,000 annual gift tax exclusion and leaving unified credit intact. Gift tax risk is also taken out of the picture – the gift is of cash, before the business is a going concern – so there is nothing for IRS to challenge.A similar approach can be undertaken with an existing business that is coming out with a new product or going into a new geographic area. If new entities are created for these purposes the trusts for issue can invest in a similar fashion.
The benefits of this approach are illustrated by Example 1, below:
- The simplest way to accomplish this end for an entrepreneur is to put trusts for the children and/or grandchildren “into” the business from the start. Instead of the parents owing 100% of the business, they can gift cash to trusts for issue and those trusts can invest that cash initially into the business (typically for non-voting interests so that the parents can keep control). Since cash to initially capitalize a business can be nominal, this approach can allow trusts for issue to own a significant share of the business using the $14,000 annual gift tax exclusion and leaving unified credit intact. Gift tax risk is also taken out of the picture – the gift is of cash, before the business is a going concern – so there is nothing for IRS to challenge.A similar approach can be undertaken with an existing business that is coming out with a new product or going into a new geographic area. If new entities are created for these purposes the trusts for issue can invest in a similar fashion.
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