The implementation of advanced planning strategies to: (1) reduce or eliminate capital gains tax; (2) reduce future estate tax; and (3) increase asset protection from creditors and lawsuits should be on every founder, owner, and investor’s mind. All strategies revolve around time and the amount of equity ownership an employee or investor has in the company. The most relied upon considerations to keep in mind while envisioning planning strategies— to save money on taxes in the long-run are:
- What stage is the company in its life cycle?
- What is the value of your shares?
- What are your current and future wants and needs?
What is QSBS?
Qualified Small Business Stock (QSBS) provides for up to a 100% exclusion of Capital Gains taxes. The QSBS regulations are located in Internal Revenue Code (IRC) Section 1202 and include criteria for both the corporation to qualify as a Qualified Small Business and criteria for the investor to determine how much of their gain may be eligible for tax exclusion.
What is a Parent-Seeded Trust?
The beneficiary defective inheritor’s trust (BDIT) is an effective estate planning strategy that lets you get the benefits of a typical trust without relinquishing control of your assets. You can continue to manage and use the assets in the BDIT without jeopardizing the trust’s ability to lower the transfer taxes and protect assets from creditors.
BDITs can contain a wide range of assets, but they’re especially useful for assets with high potential for appreciation; or that are eligible for considerable valuation discounts, such as holdings in family limited partnerships and limited liability corporations (LLCs). You can also deliver advantages to future generations without incurring transfer taxes by setting up a BDIT as a “dynasty” trust.
“Dynasty” Trusts is just a short way of specifying a long-term trust with an intention of being passed down from generation to generation without incurring any transfer taxes.
Pros and Cons of a BDIT
A parent-seeded trust, formed by the parent’s of the founder, can help to lower high state taxes as well as estate taxes. As the beneficiary, the founder can then sell shares. This method of planning eliminates gift taxes and does not require any lifetime gift exemptions. However, it also disqualifies the founder from claiming QSBS.
The advantage is that all future asset appreciation is moved out of the founder’s and parent’s estates, avoiding potential estate taxes in the future. To avoid state-level taxes, the trust can be located in a tax-exempt state. This can result in state-level tax savings of up to 10%. If the creator wishes, the trustee, who is an individual chosen by the founder, can make distributions to the founder as a beneficiary.
This trust can also be utilized for the benefit of future generations. The trustee can make distributions as they wish, avoiding the estate tax liability when assets are passed down through the generations.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.