Estate Planning as a Tool for Your Business Succession Plan

The year 2020 has been mired with uncertainty and unprecedented strife for many.

As we reflect on the past six months and prepare for the next, now may be an opportune time to consider fine-tuning your business succession strategy. Planning ahead will allow you to rest easy, knowing that your affairs are under control in these unsettled times.

Let’s look at a partnership, for instance. Without proper succession planning, upon the death or incapacity of a partner, that partner’s interest may experience undesired distribution, lost value, forced sale or goodwill concerns, not to mention a hefty estate tax. Estate planning offers some convenient solutions to better navigate such events.

Though a partner may draft his or her will to guide executors on how to manage their assets upon death, there are several steps a business owner can take during their lifetime to ensure their assets are managed in a tax-efficient manner.

One useful estate planning tool is the Intentionally Defective Grantor Trust, or IDGT. An IDGT is structured so that the grantor pays the income tax on the trust’s income since the IDGT is considered owned by the grantor. The trust, however, is not included in the grantor’s estate. This may allow the trust to be taxed at a lower rate during the grantor’s lifetime while avoiding both gift and estate tax.

As an example, a partner may create an IDGT and sell a portion of their interest to the trust for a promissory note. The sale itself is not a taxable transaction, but the partner would continue to pay tax on the income. Payments on the promissory note made to the partner are from distributions in the sold partnership interest, but the IDGT shelters the partner’s interest from both gift and estate tax.

Another useful estate planning tool is the Grantor Retained Annuity Trust, or GRAT. This trust is irrevocable and allows a business owner to transfer their shares of a partnership to the trust while retaining the right to a fixed annuity for a certain number of years. The annuity can be also be paid with distributions from the partnership to the trust. At the end of the term, which must expire during the partner’s lifetime, the property remaining in the GRAT passes on to children or an intended beneficiary.

At Schneider Downs, our team of experienced tax professionals are here to help you make tax-efficient decisions that best suit you, your family and your business. Feel free to contact us with any inquiries regarding the above information.


Partnership Tax Planning and Practice - Charles R. Levun,¶6565,Intentionally Defective Grantor Trusts

Partnership Tax Planning and Practice - Charles R. Levun,¶9689,IRS Provides Helpful Guidance for Sales of Property to Intentionally Defective Grantor Trusts

Financial & Estate Planning, Sidney Kess, Consulting Editor: Articles,¶33,121,Practical Succession Planning for the Family-Owned Business 1

©2008 S.V. Grassi and J.H. Giarmarco

Reproduced from the J ournal of P ractical E state P lanning, a CCH Tax and Accounting Publication.

By Sebastian V. Grassi, Jr. and Julius H. Giarmarco *

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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