One of the many benefits of trusts is that they typically offer some tax advantage. While many people think of trusts as something one generation sets up for the benefit of a younger one, trusts can also be used between spouses. A common scenario where this occurs is when a spouse owns a business and is looking to save gift or estate taxes by transferring equity in the business to a trust. This can be complicated as the options that save the most in taxes may raise other concerns. An experienced attorney should be consulted to provide guidance on the pros and cons and how best to structure the family trust.
What Are the Benefits of a Family Trust?
A spouse can gift equity in the business to a trust for the benefit of the other spouse and any children to utilize the spouse’s federal gift tax exemption (currently at an all-time high, but subject to change via future legislation). The trust provides flexibility in determining how much to distribute, to whom, under what conditions, and in what proportions. For example, an owner can put all or a portion of her equity in the business into a trust if she doesn’t need the money from the business and designate the beneficiaries as her children. She could also make her spouse the beneficiary. The owner can also specify the standards by which distributions are made and can pick the trustee responsible for managing and distributing the funds to the beneficiaries.
The amount placed in the trust would vary depending on an evaluation of the owner’s tax situation, financial circumstances, and other pertinent factors. A tax attorney and accountant can determine the optimal amounts. However, saving money shouldn’t be the only concern because there are other risks.
What Are the Risks of Family Trusts?
By placing equity in the business into a trust, the owner loses control over the equity given to the trust. The trustee of the trust must act in the best interests of the beneficiaries, not necessarily the best interest of the business and/or the owner, which could interfere with how the business is managed going forward.
In addition, if the owner is relying on the designated beneficiaries of the trust to accumulate trust funds or use distributions in certain ways, the owner must recognize that she cannot force them to do so. The beneficiaries may not be good with money or may have differing opinions on what are legitimate uses of the funds. This could become an even greater problem if a spouse is a beneficiary and the couple divorces or experiences marital issues later on.
Some of these risks may be addressed in the language of the trust but care must be taken to ensure that the favorable tax treatment is preserved.
The best thing to do is to discuss your situation with a skilled estate planning attorney who can explain your options and draft documents that meet your needs. Contact us to discuss a trust or estate plan that helps you achieve your goals.