If you own a family business, you will eventually need to begin thinking about what your plans are for the business when you retire, or if you die. Either way, taxes, economics, and human emotion are a lot to overcome, but it is especially difficult when you throw a family business into the combination because, even though we do not like to admit it, greed and jealousy are some of the most common causes of estate planning problems. In order to avoid these three perils, people who have invested their life in growing a family business at the same time as they were growing a family, should incorporate some business transition strategies into their estate plans.
An effective tool for managing problems arising from taxes, economics, and human emotion is the intentionally defective trust, or “IDT”. The IDT is used to freeze up certain assets of a person for tax purposes – estate taxes, not income taxes. When it is created, the IDT is purposely designed with a flaw that requires the individual to keep paying income taxes. This is because the Internal Revenue Code won’t recognize that the person has transferred away assets; at least, not for income tax purposes. It will, however, reduce the value of the estate of the grantor by the same amount as the assets that were transferred, thereby reducing the estate tax burden. Further, any funds that the grantor provides as a gift to the trust may be used to secure a promissory note for the purchase price of additional assets from the grantor.