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Laying the groundwork for succession planning

On Behalf of | Jul 1, 2022 | Estate Planning

Businesses can peak or ebb in a lifetime, but with careful planning, they can remain viable across generations. Although not all Texas business owners want to keep a closely held business in the family, most would agree that minimizing the tax burden is a positive outcome of succession planning.

Developing a long-term strategy as a company passes hands is an important part of succession planning, whether you intend to leave it to partners with a buy-sell agreement or take active measures to pick a management and ownership transfer that maximizes employee retention.

Making informed decisions will ensure a smooth transition that will be in the best interests of both the business and the owner’s family while minimizing the tax burden.

How a trust keeps assets out of probate

Business owners who wish to preserve their legacy for family members must remember that there may be a change in the value of the business from the time they prepare documents and when it is time for probate. Business and personal assets that do not have beneficiary designations will most likely go through probate.

One tool for directing assets out of probate after you pass is a trust, which is a legal arrangement in which the grantor designates a trustee to manage and administer the trust on behalf of a beneficiary. The grantor may fund the trust in a variety of ways, such as with estate assets or through life insurance.

A trust may be irrevocable, or nonreversable once created, or revocable, in which case the creator may change or revoke it. The grantor may also act as a trustee or name themselves as beneficiary so as to have access to assets.

Retaining income sources and transferring business assets

Some useful ways of managing business assets and dealing with liquidity issues include creating beneficiary designations through life insurances or annuities, such as:

  • An irrevocable life insurance trust (ILIT), which avoids probate and provides immediate cash for estates taxes or other expenses.
  • A grantor retained unitrust (GRUT), which is an irrevocable trust that pays taxes at the outset of the trust and receives annuity payments at a percentage of the fair market value of the assets.
  • A grantor retained annuity trust (GRAT), which is also irrevocable and for a limited period of time, receiving a nonvariable percentage of annuity payments.

At the end of the lifetime of both a GRUT and a GRAT, the assets in either trust will pass to beneficiaries tax-free.