Trusts: types and strategies
8 min of reading
Trusts: types and strategies
8 min of reading
Trusts: types and strategies
8 min of reading
For founders and angel investors, estate planning is a vital part of managing their financial future. Trusts can be powerful tools, providing asset protection, tax efficiency, and a way to carry out philanthropic goals.
Here’s a breakdown of various trust strategies, with examples to illustrate how each one might be used.
For founders and angel investors, estate planning is a vital part of managing their financial future. Trusts can be powerful tools, providing asset protection, tax efficiency, and a way to carry out philanthropic goals.
Here’s a breakdown of various trust strategies, with examples to illustrate how each one might be used.
For founders and angel investors, estate planning is a vital part of managing their financial future. Trusts can be powerful tools, providing asset protection, tax efficiency, and a way to carry out philanthropic goals.
Here’s a breakdown of various trust strategies, with examples to illustrate how each one might be used.
1. Nevada Asset Protection Trust (NAPT)
How it works? Ideal for safeguarding your assets like cash or property against future lawsuits or creditors. It’s a robust fortress for your wealth, especially if you’re in a profession with high liability risks. When setting up a NAPT, you give up some control over your assets to an independent trustee, but you gain significant legal protection. Remember, this trust needs to be set up before any potential threats arise, as it won’t cover already anticipated claims.
Who Should Consider It? Founders who own high-risk assets, such as business interests or real estate, and seek to protect them from future creditors.
Example: Alex, the founder of a growing tech startup, is concerned about personal liability due to the volatile nature of the tech industry. To safeguard her personal wealth, she transfers $2 million in real estate assets and $500,000 in private stock into a NAPT. She names a Nevada trust company as the trustee and start to invest in other investment instruments. By doing so, she creates a barrier against potential future creditors while maintaining a beneficial interest in the trust. Three years later, her company faces litigation, but the assets in the NAPT remain secure and out of the reach of claimants, ensuring her personal financial stability.
2. Intentionally Defective Grantor Trust (IDGT)
How it works? Explore an IDGT if you want to transfer appreciating assets like stocks to your heirs without incurring hefty estate taxes. You continue to pay taxes on the trust's income, which allows the assets within to grow tax-free for the beneficiaries. This strategy is beneficial if you expect your investments to significantly increase in value. Planning with an IDGT is a delicate balance of maintaining control over tax payments while setting the stage for future growth.
Who Should Consider It? Those who wish to transfer appreciating assets to their heirs while reducing estate taxes and retaining the income tax obligations on the assets.
Example:
Riley owns 10% of a biotech company valued at $50 million, expecting it to double in value over the next five years. To transfer this growth to her children, she sells her shares to an IDGT in exchange for a promissory note at a minimal interest rate, effectively freezing the value of the shares at the time of transfer. Any appreciation in the stock value beyond the note's interest accrues tax-free to the beneficiaries. Riley pays the income taxes on the trust’s income, which allows for the assets within the trust to grow undiminished for her children.
3. Grantor Retained Annuity Trusts (GRATs)
How it works? A GRAT is a financial tool that allows you to transfer asset growth to your beneficiaries, while you receive a fixed annuity for a set term. Imagine it as a way to "freeze" the value of your assets, allowing any appreciation to pass on tax-free after the trust term ends. When creating a GRAT, timing and asset performance are critical considerations. It's most effective with assets you expect to rapidly appreciate.
Who Should Consider It? Individuals who own rapidly appreciating assets and wish to pass on future appreciation to their beneficiaries at minimal tax costs.
Example: Casey's e-commerce platform is on the brink of a breakthrough that could significantly increase its valuation. She transfers $5 million worth of the company's stock into a two-year GRAT. In return, she receives an annual annuity of $2.6 million. When the term ends, the GRAT's remaining assets pass to her beneficiaries. The e-commerce platform’s valuation does indeed skyrocket, and the growth above the annuity payments — now worth $3 million — passes to her heirs without any additional gift tax.
4. Charitable Remainder Trust (CRT)
How it works? A CRT lets you convert a highly appreciated asset into lifelong income without incurring immediate capital gains taxes, with the remainder going to a charity of your choice after you pass. It's a win-win, providing you with tax benefits and regular income, while also supporting charitable causes. When setting up a CRT, consider your income needs, your philanthropic goals, and the tax implications. It’s ideal for those who have philanthropic inclinations and sizable estate taxes.
Who Should Consider It? Philanthropic founders and investors with highly appreciated assets who want to balance income with giving, while gaining tax benefits.
Example: Sam owns $5 million worth of stock in a tech startup that's gone public. He's reluctant to sell due to large capital gains taxes. Instead, he transfers the stock into a CRT, which sells the stock tax-free and reinvests the proceeds into a diversified portfolio. Sam receives a percentage of the trust’s value each year, providing him with a reliable income stream. He also receives an immediate charitable tax deduction based on the present value of what will pass to the charity. Upon his death, the remaining assets in the trust, now valued at $7 million due to prudent investments, go to his chosen charity, which creates a technology innovation fund in his name.
5. Nevada Dynasty Trust
How it works? This is a long-term strategy for keeping wealth within the family for up to 365 years, minimizing estate taxes, and protecting your legacy from creditors or divorcing spouses. It’s perfect if you want to benefit many future generations. With a Dynasty Trust, you can provide for your descendants while also getting creative with tax planning. The key is to consider the lasting impact and how best to support your heirs' future needs.
Who Should Consider It? Investors and founders looking to transfer wealth across multiple generations, minimizing estate taxes and protecting against creditors.
Example: Jordan, an angel investor, he inherits a family fortune of $10 million. To preserve this for his lineage, he sets up a Nevada Dynasty Trust, designating his children and future generations as beneficiaries. He places a mix of assets into the trust, including his diverse portfolio of real estate, stocks, and bonds. The trust is structured to provide each generation with income while protecting the principal. This prevents the erosion of wealth due to divorce, creditors, or spendthrift tendencies within the family.
6. Nevada Non-Grantor Trust (NING)
How it Works? A Nevada Non-Grantor Trust offers distinct tax advantages, particularly when it comes to holding and stacking Qualified Small Business Stock (QSBS). Under Section 1202 of the Internal Revenue Code, individuals can exclude a significant portion of the gain realized from the sale of QSBS. By using a Nevada Non-Grantor Trust, founders can potentially multiply the QSBS exclusion benefits due to the trust's tax treatment as a separate taxpayer. This means that each trust can qualify for its own QSBS exclusion. The trust itself is responsible for its taxes, allowing the grantor to transfer the stock without immediate tax consequences.
Who Should Consider It? Founders and angel investors with significant holdings in QSBS who want to maximize their Section 1202 tax benefits. This is particularly advantageous for those who expect their qualifying small business's stock to greatly appreciate and potentially exceed the individual QSBS gain exclusion limit upon a future sale.
Example: Mia, a founder who owns QSBS in her startup valued at $50 million, anticipates that the company will go public or acquired in the near future. To maximize her QSBS exclusion, she establishes several Nevada Non-Grantor Trusts, transferring portions of her QSBS into each trust. This strategic move positions each trust to individually qualify for the QSBS exclusion, effectively stacking the exclusions and protecting more of the gain from taxation when the stocks are eventually sold post-IPO.
1. Nevada Asset Protection Trust (NAPT)
How it works? Ideal for safeguarding your assets like cash or property against future lawsuits or creditors. It’s a robust fortress for your wealth, especially if you’re in a profession with high liability risks. When setting up a NAPT, you give up some control over your assets to an independent trustee, but you gain significant legal protection. Remember, this trust needs to be set up before any potential threats arise, as it won’t cover already anticipated claims.
Who Should Consider It? Founders who own high-risk assets, such as business interests or real estate, and seek to protect them from future creditors.
Example: Alex, the founder of a growing tech startup, is concerned about personal liability due to the volatile nature of the tech industry. To safeguard her personal wealth, she transfers $2 million in real estate assets and $500,000 in private stock into a NAPT. She names a Nevada trust company as the trustee and start to invest in other investment instruments. By doing so, she creates a barrier against potential future creditors while maintaining a beneficial interest in the trust. Three years later, her company faces litigation, but the assets in the NAPT remain secure and out of the reach of claimants, ensuring her personal financial stability.
2. Intentionally Defective Grantor Trust (IDGT)
How it works? Explore an IDGT if you want to transfer appreciating assets like stocks to your heirs without incurring hefty estate taxes. You continue to pay taxes on the trust's income, which allows the assets within to grow tax-free for the beneficiaries. This strategy is beneficial if you expect your investments to significantly increase in value. Planning with an IDGT is a delicate balance of maintaining control over tax payments while setting the stage for future growth.
Who Should Consider It? Those who wish to transfer appreciating assets to their heirs while reducing estate taxes and retaining the income tax obligations on the assets.
Example:
Riley owns 10% of a biotech company valued at $50 million, expecting it to double in value over the next five years. To transfer this growth to her children, she sells her shares to an IDGT in exchange for a promissory note at a minimal interest rate, effectively freezing the value of the shares at the time of transfer. Any appreciation in the stock value beyond the note's interest accrues tax-free to the beneficiaries. Riley pays the income taxes on the trust’s income, which allows for the assets within the trust to grow undiminished for her children.
3. Grantor Retained Annuity Trusts (GRATs)
How it works? A GRAT is a financial tool that allows you to transfer asset growth to your beneficiaries, while you receive a fixed annuity for a set term. Imagine it as a way to "freeze" the value of your assets, allowing any appreciation to pass on tax-free after the trust term ends. When creating a GRAT, timing and asset performance are critical considerations. It's most effective with assets you expect to rapidly appreciate.
Who Should Consider It? Individuals who own rapidly appreciating assets and wish to pass on future appreciation to their beneficiaries at minimal tax costs.
Example: Casey's e-commerce platform is on the brink of a breakthrough that could significantly increase its valuation. She transfers $5 million worth of the company's stock into a two-year GRAT. In return, she receives an annual annuity of $2.6 million. When the term ends, the GRAT's remaining assets pass to her beneficiaries. The e-commerce platform’s valuation does indeed skyrocket, and the growth above the annuity payments — now worth $3 million — passes to her heirs without any additional gift tax.
4. Charitable Remainder Trust (CRT)
How it works? A CRT lets you convert a highly appreciated asset into lifelong income without incurring immediate capital gains taxes, with the remainder going to a charity of your choice after you pass. It's a win-win, providing you with tax benefits and regular income, while also supporting charitable causes. When setting up a CRT, consider your income needs, your philanthropic goals, and the tax implications. It’s ideal for those who have philanthropic inclinations and sizable estate taxes.
Who Should Consider It? Philanthropic founders and investors with highly appreciated assets who want to balance income with giving, while gaining tax benefits.
Example: Sam owns $5 million worth of stock in a tech startup that's gone public. He's reluctant to sell due to large capital gains taxes. Instead, he transfers the stock into a CRT, which sells the stock tax-free and reinvests the proceeds into a diversified portfolio. Sam receives a percentage of the trust’s value each year, providing him with a reliable income stream. He also receives an immediate charitable tax deduction based on the present value of what will pass to the charity. Upon his death, the remaining assets in the trust, now valued at $7 million due to prudent investments, go to his chosen charity, which creates a technology innovation fund in his name.
5. Nevada Dynasty Trust
How it works? This is a long-term strategy for keeping wealth within the family for up to 365 years, minimizing estate taxes, and protecting your legacy from creditors or divorcing spouses. It’s perfect if you want to benefit many future generations. With a Dynasty Trust, you can provide for your descendants while also getting creative with tax planning. The key is to consider the lasting impact and how best to support your heirs' future needs.
Who Should Consider It? Investors and founders looking to transfer wealth across multiple generations, minimizing estate taxes and protecting against creditors.
Example: Jordan, an angel investor, he inherits a family fortune of $10 million. To preserve this for his lineage, he sets up a Nevada Dynasty Trust, designating his children and future generations as beneficiaries. He places a mix of assets into the trust, including his diverse portfolio of real estate, stocks, and bonds. The trust is structured to provide each generation with income while protecting the principal. This prevents the erosion of wealth due to divorce, creditors, or spendthrift tendencies within the family.
6. Nevada Non-Grantor Trust (NING)
How it Works? A Nevada Non-Grantor Trust offers distinct tax advantages, particularly when it comes to holding and stacking Qualified Small Business Stock (QSBS). Under Section 1202 of the Internal Revenue Code, individuals can exclude a significant portion of the gain realized from the sale of QSBS. By using a Nevada Non-Grantor Trust, founders can potentially multiply the QSBS exclusion benefits due to the trust's tax treatment as a separate taxpayer. This means that each trust can qualify for its own QSBS exclusion. The trust itself is responsible for its taxes, allowing the grantor to transfer the stock without immediate tax consequences.
Who Should Consider It? Founders and angel investors with significant holdings in QSBS who want to maximize their Section 1202 tax benefits. This is particularly advantageous for those who expect their qualifying small business's stock to greatly appreciate and potentially exceed the individual QSBS gain exclusion limit upon a future sale.
Example: Mia, a founder who owns QSBS in her startup valued at $50 million, anticipates that the company will go public or acquired in the near future. To maximize her QSBS exclusion, she establishes several Nevada Non-Grantor Trusts, transferring portions of her QSBS into each trust. This strategic move positions each trust to individually qualify for the QSBS exclusion, effectively stacking the exclusions and protecting more of the gain from taxation when the stocks are eventually sold post-IPO.
1. Nevada Asset Protection Trust (NAPT)
How it works? Ideal for safeguarding your assets like cash or property against future lawsuits or creditors. It’s a robust fortress for your wealth, especially if you’re in a profession with high liability risks. When setting up a NAPT, you give up some control over your assets to an independent trustee, but you gain significant legal protection. Remember, this trust needs to be set up before any potential threats arise, as it won’t cover already anticipated claims.
Who Should Consider It? Founders who own high-risk assets, such as business interests or real estate, and seek to protect them from future creditors.
Example: Alex, the founder of a growing tech startup, is concerned about personal liability due to the volatile nature of the tech industry. To safeguard her personal wealth, she transfers $2 million in real estate assets and $500,000 in private stock into a NAPT. She names a Nevada trust company as the trustee and start to invest in other investment instruments. By doing so, she creates a barrier against potential future creditors while maintaining a beneficial interest in the trust. Three years later, her company faces litigation, but the assets in the NAPT remain secure and out of the reach of claimants, ensuring her personal financial stability.
2. Intentionally Defective Grantor Trust (IDGT)
How it works? Explore an IDGT if you want to transfer appreciating assets like stocks to your heirs without incurring hefty estate taxes. You continue to pay taxes on the trust's income, which allows the assets within to grow tax-free for the beneficiaries. This strategy is beneficial if you expect your investments to significantly increase in value. Planning with an IDGT is a delicate balance of maintaining control over tax payments while setting the stage for future growth.
Who Should Consider It? Those who wish to transfer appreciating assets to their heirs while reducing estate taxes and retaining the income tax obligations on the assets.
Example:
Riley owns 10% of a biotech company valued at $50 million, expecting it to double in value over the next five years. To transfer this growth to her children, she sells her shares to an IDGT in exchange for a promissory note at a minimal interest rate, effectively freezing the value of the shares at the time of transfer. Any appreciation in the stock value beyond the note's interest accrues tax-free to the beneficiaries. Riley pays the income taxes on the trust’s income, which allows for the assets within the trust to grow undiminished for her children.
3. Grantor Retained Annuity Trusts (GRATs)
How it works? A GRAT is a financial tool that allows you to transfer asset growth to your beneficiaries, while you receive a fixed annuity for a set term. Imagine it as a way to "freeze" the value of your assets, allowing any appreciation to pass on tax-free after the trust term ends. When creating a GRAT, timing and asset performance are critical considerations. It's most effective with assets you expect to rapidly appreciate.
Who Should Consider It? Individuals who own rapidly appreciating assets and wish to pass on future appreciation to their beneficiaries at minimal tax costs.
Example: Casey's e-commerce platform is on the brink of a breakthrough that could significantly increase its valuation. She transfers $5 million worth of the company's stock into a two-year GRAT. In return, she receives an annual annuity of $2.6 million. When the term ends, the GRAT's remaining assets pass to her beneficiaries. The e-commerce platform’s valuation does indeed skyrocket, and the growth above the annuity payments — now worth $3 million — passes to her heirs without any additional gift tax.
4. Charitable Remainder Trust (CRT)
How it works? A CRT lets you convert a highly appreciated asset into lifelong income without incurring immediate capital gains taxes, with the remainder going to a charity of your choice after you pass. It's a win-win, providing you with tax benefits and regular income, while also supporting charitable causes. When setting up a CRT, consider your income needs, your philanthropic goals, and the tax implications. It’s ideal for those who have philanthropic inclinations and sizable estate taxes.
Who Should Consider It? Philanthropic founders and investors with highly appreciated assets who want to balance income with giving, while gaining tax benefits.
Example: Sam owns $5 million worth of stock in a tech startup that's gone public. He's reluctant to sell due to large capital gains taxes. Instead, he transfers the stock into a CRT, which sells the stock tax-free and reinvests the proceeds into a diversified portfolio. Sam receives a percentage of the trust’s value each year, providing him with a reliable income stream. He also receives an immediate charitable tax deduction based on the present value of what will pass to the charity. Upon his death, the remaining assets in the trust, now valued at $7 million due to prudent investments, go to his chosen charity, which creates a technology innovation fund in his name.
5. Nevada Dynasty Trust
How it works? This is a long-term strategy for keeping wealth within the family for up to 365 years, minimizing estate taxes, and protecting your legacy from creditors or divorcing spouses. It’s perfect if you want to benefit many future generations. With a Dynasty Trust, you can provide for your descendants while also getting creative with tax planning. The key is to consider the lasting impact and how best to support your heirs' future needs.
Who Should Consider It? Investors and founders looking to transfer wealth across multiple generations, minimizing estate taxes and protecting against creditors.
Example: Jordan, an angel investor, he inherits a family fortune of $10 million. To preserve this for his lineage, he sets up a Nevada Dynasty Trust, designating his children and future generations as beneficiaries. He places a mix of assets into the trust, including his diverse portfolio of real estate, stocks, and bonds. The trust is structured to provide each generation with income while protecting the principal. This prevents the erosion of wealth due to divorce, creditors, or spendthrift tendencies within the family.
6. Nevada Non-Grantor Trust (NING)
How it Works? A Nevada Non-Grantor Trust offers distinct tax advantages, particularly when it comes to holding and stacking Qualified Small Business Stock (QSBS). Under Section 1202 of the Internal Revenue Code, individuals can exclude a significant portion of the gain realized from the sale of QSBS. By using a Nevada Non-Grantor Trust, founders can potentially multiply the QSBS exclusion benefits due to the trust's tax treatment as a separate taxpayer. This means that each trust can qualify for its own QSBS exclusion. The trust itself is responsible for its taxes, allowing the grantor to transfer the stock without immediate tax consequences.
Who Should Consider It? Founders and angel investors with significant holdings in QSBS who want to maximize their Section 1202 tax benefits. This is particularly advantageous for those who expect their qualifying small business's stock to greatly appreciate and potentially exceed the individual QSBS gain exclusion limit upon a future sale.
Example: Mia, a founder who owns QSBS in her startup valued at $50 million, anticipates that the company will go public or acquired in the near future. To maximize her QSBS exclusion, she establishes several Nevada Non-Grantor Trusts, transferring portions of her QSBS into each trust. This strategic move positions each trust to individually qualify for the QSBS exclusion, effectively stacking the exclusions and protecting more of the gain from taxation when the stocks are eventually sold post-IPO.
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