A well-structured trust is often a central estate planning tool for small businesses and closely held family business owners when passing a business or wealth to your children. This includes heirs, beneficiaries, and future generations of your family and spouses while minimizing the impact of taxation and maximizing control.
The state you live in will determine where your business and assets go if you pass away without a well-conceived estate plan. Many states would divide these assets in half; the children would divide one half, and your spouse would receive the other half. The costs of probate alone would consume more than 10% of your wealth in most states.
The estate tax provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 almost doubled estate tax exclusions. The estate tax deduction is currently $13.99 million for an individual. If Congress elects not to address the sunsetting TCJA, the estate tax deduction would revert to 2017 levels adjusted for inflation, or approximately $7 million. Small business owners should carefully watch developments surrounding the TCJA this year. This could also impact the amount of the Alternative Minimum Tax (AMT), and lower the initial AMT taxation level by $20,000 (meaning, you will be paying more taxes on less income in fiscal tax year 2026).
Business succession planning ensures that your company is protected and that ownership and control of the company pass smoothly to your designated beneficiaries or designated internal management if and when the time comes. Passing a business or wealth to your children while providing for the needs of your surviving spouse requires careful planning and execution.
This process will require the integration of several different professional areas of service. Look for an experienced tax attorney who can provide insight and advice into taxation's impact on your wealth and how to reduce or eliminate this burden altogether. A business and estate planning attorney should have the experience to provide sound guidance and counsel while helping to structure corporate documents and provide required trusts and new business entities. Integrated accounting services would help to structure all entities in a manner that captures crucial information while providing the data required to meet business financials and tax reporting requirements.
What do you want to happen to your company? Do you want your spouse to be supported by the income it generates, but have someone else run the business? Do you want to pass ownership to your child(ren) when they are prepared to step in to run the company? In many cases, a trusted partner or remaining members or shareholders will have the option to acquire your interest. In other instances, selling your interests and preserving wealth for your spouse, children, heirs, and beneficiaries may be most prudent. There are many types of legal trusts, and your goals for transitioning or preserving the business after passing will determine the best solution to accomplish those goals while minimizing the impact of taxation.
If you own a foreign corporation or have offshore assets or interests, you will need experienced FBAR and international tax attorneys who can provide insight into the complications of transitioning offshore assets and interests. Developing an estate planning and business succession strategy that ensures compliance with the IRS tax reporting, Form 8938, and FBAR requirements will be essential while preserving and protecting all you've built.
Ask about the protections of the attorney-client privilege, especially how that extends to issues of unreported or under-reported offshore interests and assets. These protections are unavailable from CPAs, accountants, tax preparers, financial planning, and wealth management professionals.
The process of passing a business or wealth to your children requires extensive planning that often begins with the development of a thorough, well-documented, and detailed inventory of checking and savings accounts, retirement accounts and pensions, real estate, as well as business assets, including machinery, inventory, and intellectual property.
A soundly-crafted strategy for providing for a spouse while passing a business or wealth to your children will require several disciplines, including legal, tax, accounting, estate planning, and business advisory services. Look for a business partner who can integrate these disciplines and develop and implement the right solution for your unique circumstances and portfolio.
