Trusts, Estate Planning & Business Valuation
There are several types of trusts that can be used in estate planning. Each type of trust has its own unique features and benefits, and the best type of trust for a particular situation will depend on the individual's goals and circumstances. Here are some of the most common types of trusts for estate planning:
Revocable living trust: A revocable living trust is a type of trust that can be created during a person's lifetime and can be changed or revoked at any time. This type of trust is often used to avoid probate, which is the court process that distributes a person's assets after their death. With a revocable living trust, the assets in the trust are distributed to the beneficiaries without the need for probate.
Irrevocable trust: An irrevocable trust is a type of trust that cannot be changed or revoked once it is established. This type of trust is often used for tax planning, asset protection, or to provide for a special needs beneficiary. Assets placed in an irrevocable trust are typically no longer considered part of the grantor's estate and are therefore not subject to estate taxes.
Testamentary trust: A testamentary trust is a type of trust that is created through a person's will and becomes effective after their death. This type of trust can be used to provide for the care of minor children or to provide ongoing support for a beneficiary with special needs.
Charitable trust: A charitable trust is a type of trust that is set up to benefit a charitable organization. There are several types of charitable trusts, including charitable lead trusts, charitable remainder trusts, and pooled income funds. Charitable trusts can be used to provide tax benefits for the grantor while supporting a charitable cause.
Special needs trust: A special needs trust is a type of trust that is used to provide ongoing support for a beneficiary with special needs. This type of trust can help ensure that the beneficiary's government benefits are not affected by the assets in the trust.
Asset protection trust: An asset protection trust is a type of trust that is used to protect the grantor's assets from creditors or legal claims. This type of trust can be established in certain states or foreign jurisdictions that offer greater asset protection.
GRATs and SLATs are both types of irrevocable trusts used in estate planning, but they serve different purposes and have different features. Here are some of the key differences between GRATs and SLATs:
GRATs (Grantor Retained Annuity Trusts): A GRAT is a type of trust that allows the grantor to transfer assets to the trust while retaining the right to receive a fixed annuity payment for a specified period of time. At the end of the trust term, any remaining assets in the trust are transferred to the beneficiaries free of gift or estate taxes. GRATs are often used for estate tax planning and can be an effective way to transfer assets to family members without incurring significant tax liability.
SLATs (Spousal Lifetime Access Trusts): A SLAT is a type of trust that is established by one spouse for the benefit of the other spouse and/or their children. The spouse who establishes the trust can make gifts to the trust, which are then managed by a trustee for the benefit of the beneficiaries. SLATs can be used to provide financial support to a spouse or children while also reducing the grantor's taxable estate.
Here are some additional differences between GRATs and SLATs:
Control: With a GRAT, the grantor retains control over the assets in the trust for the duration of the trust term. With a SLAT, the grantor relinquishes control over the assets, which are managed by a trustee.
Tax consequences: GRATs are primarily used to reduce estate and gift taxes, while SLATs are used for income tax planning and reducing the taxable estate.
Timing: GRATs are established for a specific term, usually between 2 and 10 years. SLATs are established for the lifetime of the beneficiaries or until the trust assets are exhausted.
Flexibility: GRATs do not provide much flexibility once they are established, while SLATs can be modified to accommodate changing circumstances.
It's important to work with an experienced estate planning attorney to determine which type of trust is best suited to your individual needs and goals. Both GRATs and SLATs can be effective estate planning tools, but they should be used in the context of a comprehensive estate plan that takes into account your unique circumstances and goals.
When transferring or gifting a business into a trust for tax purposes, a business valuation is typically required to determine the fair market value of the business. The valuation can help establish the value of the business for estate and gift tax purposes and can also help to ensure that the transfer is done in compliance with IRS regulations.
Here are some key considerations when obtaining a business valuation for transfer or gift into a trust tax purposes:
Hire a qualified appraiser: The IRS requires that a qualified appraiser be used to conduct the business valuation. A qualified appraiser is one who meets certain education and experience requirements and who adheres to professional standards.
Determine the purpose of the valuation: The purpose of the business valuation should be clearly defined at the outset. In the case of a transfer or gift into a trust for tax purposes, the purpose is to determine the fair market value of the business for estate and gift tax purposes.
Gather financial information: The appraiser will need access to the company's financial statements, tax returns, and other financial information to perform the valuation. The appraiser will use this information to determine the company's revenue, expenses, cash flow, and other financial metrics.
Consider market conditions: The appraiser will also consider market conditions and industry trends when conducting the valuation. This will help to determine the overall value of the business within the context of the larger market.
Use appropriate valuation methods: The appraiser will use a variety of valuation methods to determine the value of the business, including the income approach, market approach, and asset-based approach. The specific methods used will depend on the type of business and the available financial data.
Document the valuation: The appraiser will prepare a report detailing the methods used, the financial data analyzed, and the final valuation of the business. This report will be used to support the transfer or gift of the business into the trust and may be reviewed by the IRS.
It's important to note that the valuation process can be complex and it's important to work with an experienced appraiser and/or tax professional who can guide you through the process and ensure that the transfer or gift is done in compliance with IRS regulations.