What Are You Doing to Prepare Your Business for Long-Term Financial Success?

Generation-Skipping Trusts: Here's What Every Business Owner Needs to Know

You’re a hard worker. You’re passionate about your business. You’re invested in giving your children—and their children—more opportunities, helping them live comfortable, fulfilling lives. You’ve taken all the right steps to grow your business. But what are you doing to make sure your business is sustainable from generation to generation—long after you’re gone?

If retaining the business within the family is under consideration, you should consider the benefits of avoiding an estate tax on future generations. Fortunately, generation-skipping trusts (GSTs) offer business owners a legal route to avoid paying an estate tax multiple times—after paying the first round of taxes when passing their estate to their children’s benefit. Subsequent generations can then pass the assets down to their children’s children, and beyond, without further tax.

Early gifting helps minimize the amount of money you owe the IRS when you pass along your business (or any appreciating asset), but they also position your business for continued growth even after you hand over the reins. Moreover, if established early enough to be valued below the lifetime expedition—currently $11.7 million—the transfer can be made without any tax. Gifting into a GST protects assets from subsequent estate taxes, which would otherwise be due each time the business moves to the next generation.

What is a generation-skipping trust?

A generation-skipping trust is a trust agreement that passes assets directly to the grantor’s future generations, each in their turn. Each generation receives benefits from the trust during their lifetimes. Overall, GSTs are an astute solution for grantors who wish to avoid having their estate taxed with each passing generation, particularly if they plan to pass a significant asset down through their family.

The federal estate tax exemption limit is currently set at $11.7 million (but is subject to change, like all tax laws). Depending on your state, additional estate taxes may be due. For instance, Illinois has estate tax rates as high as 16%. Wisconsin and Florida, on the other hand, are among the 38 states that do not levy an estate tax at the state level. As a private business owner, your business holdings are a significant part of your taxable estate. That means if you possess significant business assets that you plan on keeping in your family, you’ll be subject to estate taxes with each succession—which could threaten the future financial viability of your business.

By taking advantage of a GST, you can effectively eliminate several generations of transfer taxes—or more if the GST uses the law of a state that recognizes perpetual trusts—and keep financial resources within your family’s business to help it grow. Additionally, even if the business is sold in the future, the proceeds can be reinvested within the GST and shielded from future estate taxes.

Is a generation-skipping trust right for you?

A generation-skipping trust can be a powerful financial tool for private business owners—but how do you know if you need one? Here are a few situations that suggest you may benefit from a GST:

Your business is growing steadily: If you have a large estate and own assets worth more than $11.7 million, you’ll incur additional taxes when transferring your assets to a beneficiary. If they plan to pass the business to their children (your grandchildren), the business will see another round of taxes, set at a rate that reflects the value of the business at the time of the transfer. If your business is growing, its future value may be significantly higher than it is now, which means—the longer you wait to transfer—the more taxes you’ll pay. In that case, a GST trust may be the way to go, given that you’ll skip the additional tax and will only be taxed for the current market value of your business, not the higher future value.

You plan to pass business ownership to a family member or friend: Transferring your business assets to a generation-skipping trust—meant to last several generations—will benefit both skip and non-skip individuals. In other words, even though ownership skips a generation, your entire family stands to benefit from a GST, because income generated by the trust is accessible to any beneficiaries identified by the terms of trust. If you’re already planning to keep your business holdings in the family, a generation-skipping trust offers a straightforward way to minimize estate taxes without excluding family members from the benefits of your business’ success.

You’re okay with an irrevocable gift: Because a GST is an irrevocable agreement you, your children, and your spouse will never regain ownership control of the assets held within the trust. Control passes to the trustee, whose duties are to represent the beneficiaries. But you need not pass operating control to the trustee if your contribution is a minority position of the company. This allows grantors to defray taxes while preserving decision-making power and majority ownership of their business.

How can the right banking partner help you navigate a GST?

Ultimately, a generation-skipping trust is a wise strategy for promoting capital preservation—and it can help your business retain the value and liquidity it needs to sustain long-term growth.

But a GST is also a complex financial agreement—meaning the specific terms of your agreement may vary depending on your assets and your goals. It’s also a legal entity, so you’ll incur legal fees should you choose to utilize one as part of your overall estate plan. Partner with an experienced advisor who—before you make an investment—can help you determine whether a GST is the right decision to optimize your financial wellbeing.

At First American Bank, our team offers ongoing support and will personally guide you through every step of the GST process—providing you with the information you need to make the right decision regarding the future of your assets, including your business.

Prepare your business for tomorrow today. Setting up a generation-skipping trust earlier rather than later can help you make other important tax decisions—while providing your business with a secure foundation to support future growth.

Take the smart step.
Talk to Us
Become a First American Bank Insider
Get the latest financial news, business insights, and investment tips directly to your inbox.