Succession Planning

The aging population of baby boomers has precipitated the need for these people to focus on succession planning at both the personal and business levels. At the personal level, a significant focus on succession planning includes (1) preservation of after tax capital to pass down to their successor generation(s) and (2) providing the liquidity to pay the estate taxes without the need to dispose of non-liquid assets intended for their beneficiaries. At the business level, succession planning encompasses both planning for the human resources necessary to perpetuate a family business into the future as well as protecting the business’ ability to continue after the death of its owners and the anticipation of capital diminution caused by paying estate taxes. The aging of the baby boomers and the resulting need for succession planning has created substantial opportunities for tax professionals, including accountants and attorneys, to assist their clients in accomplishing their estate and succession planning objectives.

Popular techniques often recommended by professionals to assist their clients in accomplishing their succession and estate planning goals include, but are not limited to, the creation of special purpose trusts such as Grantor Retained Annuity Trusts (GRATS), Intentionally Defective Grantor Trusts (IDGTS), Irrevocable Life Insurance Trusts (ILITS) and S Corporation specific trusts such as Electing Small Business Trusts (ESBTS) & Qualified Subchapter S Trusts (QSSTS).

A trust is a legal entity, whereby the person creating the trust (the Grantor) transfers ownership of certain assets to a Trustee who manages and administers the assets for the benefit of the beneficiaries in accordance with the terms set forth in the ...

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...state. The minimum 10-year requirement also prohibits the use of short-term, rolling GRATs used to limit the effect of poor investment performance (in addition to minimizing the possibility of the grantor’s death during the term). The minimum remainder interest requirement and the prohibition on reductions in the annual annuity will eliminate the ability to use zeroed-out GRATs. Finally, the maximum term limitation eliminates the ability to use long-term GRATs to take advantage of a current low applicable 7520 rate and avoid future increases in such rate (4).

Crucial factors that should be considered when forming a GRATs and all subsequent trusts discussed in this paper is the age & physical health of the grantor, the grantor’s financial position upon formation of a trust, interest rates and the value of all of the assets that will be transferred into the trust.