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A Small Business Owner’s Guide to Texas Trusts 

Law Office of Todd A. Wilson > Business  > A Small Business Owner’s Guide to Texas Trusts 

A Small Business Owner’s Guide to Texas Trusts 

A Small Business Owner’s Guide to Texas Trusts | TAW Law TX

Discover What Types of Trusts Are Better Suited for Different Types of Businesses & Objectives

Trusts can be indispensable tools for forward-thinking small business owners. Across nearly every industry, trusts for small businesses in Texas can be highly effective devices for asset protection, succession planning, retirement income strategizing, estate tax mitigation, and so much more. 

That may mean that some small business owners can benefit from setting up multiple trusts, all with unique objectives. That doesn’t, however, narrow down the options or point you in the right direction when it’s time to set up a trust for your small business in Texas.

To help you with that, this guide on trusts for Texas small businesses shares more on: 

This guide can walk you through the various options for small business trusts, explaining how each device works, the potential benefits, and the types of small businesses that could benefit from them. 

Whenever you’re ready for more information from experienced business and trust attorneys in Austin, Texas, just contact TAW Law Texas

IDGTs for Small Businesses in Texas

Intentionally defective grantor trusts (IDGTs) are among the more popular trusts for small businesses in the Lone Star state. That’s because these devices can allow small business owners to take certain actions with company assets and interests that may otherwise not be possible. 

Specifically, with IDGTs, Texas small business owners can:

  • Freeze the value of certain business assets: When you transfer business interests into an IDGT, the value of those assets usually remains “fixed” for tax purposes. That can be a savvy way to let appreciation grow in a “tax-free” environment, with beneficiaries able to inherit that appreciation according to the terms and timeframe stipulated in the trust.
  • Remove business interests from the grantor’s (trustmaker’s) estate: If IDGTs are funded with business assets, those assets become the property of the trust, reducing the overall value of the grantor’s estate. This could result in some estate tax advantages later, depending on the nature of the estate.
  • Shield business assets from risk: Lawsuits, creditors, divorce, and more could threaten to chip away at a small business’ assets unless those items are held by an IDGT (or another trust) that protects them from certain claims or legal actions. That could be useful if, for instance, multiple partners share interests in a single business, and one is about to be sued for divorce, an auto accident, or some other personal matter.
  • Achieve certain income tax efficiencies: “Defective” in name only, IDGTs let grantors cover the income taxes for business assets held by these trusts, despite the grantor not technically “owning” those assets. That’s the “defect” associated with these trusts, and it opens up a loophole that small business owners can leverage for tax advantages.
  • Hand a company over to the next generation: Family businesses commonly use IDGTs for succession planning and estate planning, designing these trusts to transfer business holdings to the next generation, outside of probate for faster, more confidential, and more seamless transitions. In this capacity, IDGTs can serve as a sort of “dynasty trust” for some small businesses.

With these benefits, small business owners who set up IDGTs can also take advantage of: 

  • Flexible funding options: IDGTs can hold various types of business assets, including (but not limited to) cash, collectibles, securities, stocks, bonds, real estate holdings, and royalties. In fact, IDGTs can be funded with any combination of these types of assets. Ideally, however, the assets used to fund IDGTs should appreciate in value, so this type of trust can deliver the maximum potential benefits.
  • Asset swapping: Once an intentionally defective grantor trust has been funded, the trust can be set up so that its assets may be exchanged for others of equal value later. For example, the cash in an IDGT may be swapped out for real estate of equal value when advantageous for the grantor(s). This provides an additional layer of flexibility in funding IDGTs, which could benefit small business owners who want to retain a more active role in managing their business assets.
  • Asset “sales” to the trust: To avoid triggering gift tax exemptions, grantors can sell assets to intentionally defective grantor trusts. This can occur when funding the trust and after. When it does, the trustee of the IDGT will issue the grantor a “promissory note” that explains how the trust will pay for the asset(s) involved in the sale. 

Several types of small businesses can enjoy these benefits, as long as they properly establish, fund, and administer IDGTs.

Texas Small Businesses That May Benefit from IDGTs: Examples

Intentionally defective grantor trusts are in-demand devices for many small business owners in Texas. That includes (but is not limited to) those operating companies in the following industries:

  • Agriculture and ranching, with farming and ranch land often funding IDGTs
  • Real estate and construction, with both commercial and residential properties held in IDGTs
  • Finance, with various accounts, bonds, securities, and other financial assets sold to or transferred into IDGTs

Additionally, IDGTs can be particularly useful for S Corporations and family business succession planning. To find out how an IDGT could work for your small business, talk to an Austin, Texas trust attorney at TAW Law Texas. We routinely partner with business owners and entrepreneurs to set up intentionally defective grantor trusts, and we’re ready to answer your questions in a free, confidential consultation. 

GRATs for TX Small Business Owners

Grantor retained annuity trusts (GRATs) are another effective device for small business owners in Texas. Offering similar benefits as IDGTs, GRATs for small business owners can provide a way to: 

  • Transfer business interests to a successor outside of probate: Beneficiaries named in grantor retained annuity trusts can inherit business interests without court intervention and lengthy probate. That can allow for confidential transitions that happen on a much faster timeline than if the business was transferred via a will (or if there was no will left behind).
  • Gain certain tax advantages: GRATs can reduce the value of the grantor’s estate while allowing that individual to transfer certain assets without invoking gift and estate tax exemptions. That can make GRATs a powerful tax mitigation strategy for some small business owners.

Different from IDGTs, however, GRATs can also be structured to make routine annuity payments to the grantor, with: 

  • The appreciation of the trust’s assets used to make the annuity payments
  • The principal reserved for the designated beneficiaries

Consequently, some small business owners use GRATs in retirement, succession, and estate planning to:

  • Create a reliable income stream for the term of the trust: Grantors will decide how much the annuity payments are, the frequency of these payments, and the duration of the GRAT itself. That provides flexibility to design these trusts for an array of short- and longer-term needs.
  • Set up a “tax-free” environment for business growth: The value of the assets held in the GRAT will be “frozen” at the time of transfer for tax purposes. That can “lock in” a lower value for the IRS while still letting assets appreciate, with that appreciation occurring “off the books” so to speak.
  • Transfer business assets however they want: Grantors can dictate who gets which business interests when the GRAT expires. 

Keep in mind that GRATs for small business owners tend to work best when:

  • The trust is funded with appreciating assets: If there’s no appreciation or the assets decrease in value, trustees may need to dip into the principal to cover the annuity payments, leaving less (or nothing) for the intended beneficiaries.
  • The grantor won’t need to reclaim those assets: GRATs are irrevocable trusts, so they cannot be altered once activated. That means that any assets sold or transferred to grantor retained annuity trusts cannot be taken back later. So, ideally, GRATs should be funded with assets that grantors are completely ready to part with.
  • The grantor survives the trust: If a GRAT outlasts the grantor who made it, all assets could go back into the estate. That could negate any advantages grantors were trying to achieve with GRATs, possibly tipping the scales too much and subjecting estates to sky-high estate tax rates.

What Are the Best Business Assets for GRATs?

Small business owners can fund grantor retained annuity trusts with various assets. Commonly, business assets like the following tend to work well in GRATs: 

  • Pre-IPO (initial public offering) stock
  • Appreciating stocks
  • Real estate holdings
  • Hedge fund investments 
  • Intellectual property (IP)

What Types of Small Businesses Can Benefit Most from GRATs?

Grantor retained annuity trusts can benefit many types of small businesses, including (and not limited to):

  • Rapidly growing companies, like tech startups, viral brands, and innovators in any industry
  • Family businesses that will be kept in the bloodline and passed on to the next generation 
  • Real estate companies and developers that hold sizeable, appreciating assets 
  • Businesses that have appreciating IP

Given how sophisticated GRATs can be, setting them up with an experienced estate planning lawyer is generally in your best interests. That can give you the support and guidance you need to successfully navigate the intricacies of grantor retained annuity trusts, so you’re able to maximize their value for your small business.

7 Other Effective Trusts for Small Businesses in Texas

Beyond IDGTs and GRATs, small business owners can leverage many other trusts to achieve several goals. Those trusts could include (and are not limited to):

  1. Living trusts: Also known as revocable trusts, living trusts can be well-suited for solopreneurs and operators of limited liability corporations (LLCs), giving them control over certain business assets held by the trust (during their lifetime) while establishing beneficiaries and terms for distribution (upon death).
  2. Irrevocable trusts: Unable to be changed once set up, irrevocable trusts can offer small business owners a way to shield certain business assets from risk during the grantor’s life while letting those interests bypass probate after the grantor passes away.
  3. Real estate privacy trusts (REPTs): Commercial property can be transferred into REPTs to keep the owners private while naming beneficiaries and the terms of transfer.
  4. Irrevocable life insurance trusts (ILITs): Used for life insurance policies and benefits, ILITs can keep these assets out of probate, preserving more for a business owner’s designated beneficiaries.
  5. Family limited partnerships (FLPs): These devices provide a means of gifting business shares to family members while retaining control over the company. While FLPs may not work for all companies or business owners, they can be an indispensable tool for preserving generational wealth and transferring family business interests.
  6. Special needs trusts: Small business owners who have loved ones with special needs can set up these trusts as a way to care for their dependents without affecting their government benefits (like disability benefits). While special needs trusts are not directly for businesses, they can indirectly support a company by keeping the owner’s personal affairs separate and well-planned for outside of the business operations and assets.
  7. More: Small business owners may also benefit from setting up Charitable Remainder Trusts, Spousal Lifetime Access Trusts (SLATs), and/or other devices, depending on their needs and objectives. 

Ultimately, you may need one or several trusts to protect your small business interests and accomplish your objectives. No matter what that looks like for you, consulting an attorney can help you cover all your bases in the best ways possible.

When to Talk to an Austin Lawyer about Trusts for a Small Business 

When you’re considering trusts for a Texas small business, educated guesses and cookie-cutter online services can’t deliver the precision or assurances you need. A seasoned Austin trust and business lawyer at TAW Law Texas can, however. 

With deep experience in devising trusts focused on business assets and objectives, our Austin lawyers can explain your best options after learning more about your circumstances, your business, and your goals. Our team can also devise and administer a vast range of simple to highly complex trusts, providing optimal solutions, client-first service, and greater peace of mind. 

To find out more, simply email us or call 512-827-9212 now for a free, confidential, no-obligation consultation with a top Austin trusts lawyer.

Known for providing extraordinary counsel, our Austin lawyers are proud to offer comprehensive estate planning, trust, and probate services throughout Travis County, Williamson County, Bastrop County, Blanco County, Hays County, and beyond. We’re also honored to continue advancing our offerings, with premium probate as one of the newest options available for next-level counsel and service.

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Todd A. Wilson

Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.

The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.