April 25th, 2023
We are pleased to share the newest chapter of BBR In The Weeds. It delves into planning strategies and techniques of specific benefit to founders and entrepreneurs. Featuring Ryan Preston, Partner, Director of Portfolio & Wealth Advisory and Michael Arlein, Partner at Patterson Belknap Webb & Tyler, LLP.
Founders and entrepreneurs have unique needs. Smart planning in key areas can significantly improve outcomes.
First Key Area: Income Tax Planning
Strategy 1: Qualified Small Business Stock (QSBS) Exemption, are you qualified?
- QSBS rules enacted in 1993 to encourage investment in small business by decreasing the potential tax liability for founders.
- If qualified, the owner may be exempt from federal tax on the greater of $10mm of otherwise taxable income, or ten times their tax basis.
- This benefit can be multiplied by “stacking” QSBS eligible entities. A QSBS multiplier approach allows for each individual owner to receive the same tax exemption.
Strategy 2: State Income taxes, know your geography
- Under certain circumstances parents can create and fund a trust for the benefit of a child that is exempt from state income tax.
- Organized correctly this strategy creates a “nomadic” trust for state income tax purposes.
- Working with an advisor who has deep knowledge of the applicable jurisdiction is a key starting point.
Second Key Area: Estate Planning
Strategy 1: Trust creation and lifetime gifting
- Gifts made to trusts enable grantors to have varying degrees of control over the assets while ensuring they are removed from their estate for tax purposes.
- Trusts can be structured with specific benefits allowing grantors to create a customized framework for passing on their wealth.
- Customized investment strategies can be designed to support the specific goals of the trust for a seamless integration with the planning.
- Founder equity or other early-stage equity can be attractive to gift at an early valuation, allowing for much greater utilization of the lifetime gift exemption limit.
Strategy 2: Grantor Retained Annuity Trusts (GRATs)
- Avoids transferring current value and instead transfers potential future appreciation, sometimes referred to as an “estate freeze” strategy.
- Structured properly, GRATs do not count against the lifetime exemption amounts because the grantor retains an annuity interest equal to the value of the asset transferred.
- The power of the GRAT lies in the ability to appreciate assets well above the annuity and interest payments required.
Timing is Everything. Tools Work Better Together.
In combination with integrated investment strategies, these techniques offer significant preservation potential for founders and others with growing wealth. By addressing these decision points well in advance of an IPO, merger, or acquisition, value creation can be greatly enhanced. Thoughtful planning, proactive entity creation, and choosing the right partners will make all the difference.