Entrepreneurs in Nevada are usually optimistic individuals, and they may find it uncomfortable to think about end-of-life issues and what will happen to their companies after they pass away. However, failing to address these matters can have dire financial consequences if the business is valuable or growing quickly. This is because business interests are considered part of a decedent’s estate, which means they must go through probate and are subject to the federal estate tax.
Irrevocable life insurance trusts
The federal estate tax is 40%, and the estate has no more than 15 months to pay it. It may be necessary to sell assets such as a business to raise the necessary funds, which could be difficult considering the time constraint. One way to plan for this expense is setting up an irrevocable life insurance trust. The trust takes out a life insurance policy on a business owner that will pay enough to cover estate taxes, and the business owner gifts the trust the money needed to purchase the policy and pay the premiums. Because the trust is irrevocable, the benefits paid by the insurance policy are not subject to estate tax and do not have to go through probate.
Grantor retained annuity trusts
Setting up a grantor retained annuity trust, or GRAT, is a prudent business planning move for entrepreneurs with companies that are growing fast. This is a type of irrevocable trust that is established for a set number of years. When the assets placed into a GRAT increase in value, any appreciation over the Internal Revenue Service Section 7520 rate can be passed to heirs without paying estate or gift taxes.
Help with estate planning
If you own a business and would like to make sure that it passes to your heirs in a way that minimizes your estate’s tax exposure, an experienced estate planning attorney may suggest ways you could achieve these goals by using certain trusts. Other options that an attorney might discuss with you include setting up a limited liability company or a family limited partnership and placing assets in a grantor retained interest trust.