Yes, absolutely, funding a bypass trust, also known as a credit shelter trust or an exemption trust, with the proceeds from a business sale is a common and effective estate planning strategy.
What are the Estate Tax Implications of a Business Sale?
When a business is sold, the proceeds are considered part of the seller’s estate for federal estate tax purposes. As of 2024, the federal estate tax exemption is $13.61 million per individual; however, this number is scheduled to be cut roughly in half in 2026, unless Congress takes action. For those approaching or exceeding this threshold, utilizing strategies like bypass trusts becomes crucial to minimize potential estate taxes. A bypass trust operates by taking advantage of the annual gift tax exclusion and the lifetime exemption, shielding a portion of the assets from estate taxes. It’s important to note that approximately less than 1% of estates are subject to federal estate tax, but for those that are, the impact can be significant—reaching up to 40% of the assets above the exemption amount. This is where strategic planning with an estate attorney becomes essential, as careful asset allocation can dramatically reduce the tax burden.
How Does a Bypass Trust Actually Work?
A bypass trust is designed to hold assets exceeding the estate tax exemption amount. Upon the death of the grantor (the business owner), the assets in the trust “bypass” their estate and are not subject to estate tax. Instead, the assets remain in the trust for the benefit of designated beneficiaries – often a spouse and/or children. The trustee manages the trust assets according to the terms outlined in the trust document. For example, income generated by the trust can be distributed to beneficiaries, and the principal can be used for specific purposes like education or healthcare. Consider a scenario where a business owner sells their company for $20 million. By funding a bypass trust with $6.39 million (half of the $13.61 million exemption for 2024), they effectively remove that portion of the proceeds from their taxable estate. The remaining proceeds can be managed outside the trust, and strategic gifting can further minimize future estate taxes.
I Remember Old Man Hemlock and His Messy Estate…
Old Man Hemlock, a local carpenter, built a successful business over decades. When he passed away, his estate was a chaotic mess. He hadn’t updated his estate plan in years, and the proceeds from selling his workshop were simply added to his existing assets. His children fought over the inheritance, and a significant portion of the estate was lost to legal fees and estate taxes. Had he utilized a bypass trust, or even a simple will with clear instructions, his family could have avoided years of heartache and financial strain. It was a difficult situation, seeing the fruits of his labor diminished by a lack of foresight and planning – a stark reminder of the importance of proactive estate planning. It’s estimated that families involved in estate disputes can lose between 20-40% of the estate’s value due to legal battles and administrative costs.
But Then There Was the Case of the Baker Family…
The Baker family owned a thriving bakery, and when they decided to sell, they came to me for guidance. We established a bypass trust and funded it with a portion of the sale proceeds, carefully calculating the exemption amount and potential future tax liabilities. The trust was structured to provide for their children’s education and provide a comfortable retirement for the Bakers. Years later, when the last parent passed away, the trust seamlessly distributed the assets according to the predetermined plan. Their children received their inheritance without any disputes or tax complications, and the family remained unified and financially secure. The Bakers’ story is a testament to the power of proactive estate planning, demonstrating how a well-structured bypass trust can safeguard a family’s legacy and ensure a smooth transition of wealth. Proper estate planning can reduce the probate process by as much as 50% saving families significant time and money.
In conclusion, funding a bypass trust with proceeds from a business sale is a powerful tool for estate tax planning, but it requires careful consideration and professional guidance. It’s essential to consult with an experienced estate planning attorney like myself to ensure the trust is properly structured and aligned with your specific financial goals and family circumstances.
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb. This applies perfectly to estate planning; it’s never too late to start protecting your assets and securing your family’s future.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
● Free consultation.
Services Offered:
estate planning
living trust
revocable living trust
family trust
wills
banckruptcy attorney
Map To Steve Bliss Law in Temecula:
https://maps.app.goo.gl/oKQi5hQwZ26gkzpe9
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “Can I disinherit someone in my will?” Or “What are letters testamentary and why are they important?” or “Do my beneficiaries have to do anything when I die? and even: “Will my wages be garnished during bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.