3 Ways Business Owners Can Maximize Generational Wealth

1. Spousal Lifetime Access Trust (SLAT)  

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust that allows you to gift assets to your spouse and future generations while removing those assets from your taxable estate. Here is how it works:  

• You create trust and transfer assets (like business interests) into it.
• Your spouse is named as a beneficiary, along with your children or other heirs.
• You can serve as the trustee, maintaining some control over the assets.
• The assets grow outside of your estate, potentially saving significant estate taxes.
• Your spouse can access trust assets if needed during their lifetime.  

The key advantage of a SLAT is that it allows you to make a significant gift for estate tax purposes while still maintaining indirect access to the assets through your spouse. This can provide peace of mind that you won't be left without resources if circumstances change.  

2. Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is another powerful wealth transfer tool, especially well-suited for business interests or other assets expected to appreciate significantly. Here is an overview: 

•  You transfer assets into an irrevocable trust for a specified term (often 2-10 years).
• You receive annuity payments from the trust during the term.
• At the end of the term, any remaining assets pass to your beneficiaries.
• The gift's value for tax purposes is reduced by the value of your retained interest.
• If the assets appreciate more than the IRS assumed rate, the excess passes tax-free.  

GRATs can be particularly effective in a low-interest-rate environment. They allow you to transfer future appreciation to heirs with minimal gift tax impact. For business owners anticipating significant growth, a GRAT can be an excellent way to transfer that future value efficiently. 

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3. Sale to an Intentionally Defective Grantor Trust (IDGT)

This strategy combines elements of a traditional sale with the tax benefits of a grantor trust. Here is how it typically works:

• You create an irrevocable trust, but it's "defective" for income tax purposes (you pay the income taxes).
• You sell assets (like business interests) to the trust in exchange for a promissory note.
• The trust pays you back over time with interest.
• Any appreciation above the interest rate passes to heirs free of gift and estate tax.
• You continue to pay income taxes on the trust's earnings, allowing more growth for heirs.  

This strategy can be particularly powerful for rapidly growing businesses. It allows you to freeze the value of the asset for estate tax purposes at the time of the sale, while future growth occurs outside your estate.  

Considerations and Next Steps 

While these strategies can be incredibly effective, they're also complex and come with various pros and cons. Here are some key points to keep in mind:

• These techniques often work best when implemented early, allowing more time for assets to appreciate outside your estate.
• Proper valuation of business interests is crucial, especially for GRATs and sales to IDGTs.
• Changes in tax laws could impact the effectiveness of these strategies, so timing and flexibility are important.
• Each strategy has specific rules and requirements that must be carefully followed.

Given the complexity of these wealth transfer techniques, it's crucial to work with experienced professionals. A team including an estate planning attorney, CPA, and financial advisor can help you determine which strategies align best with your goals and implement them correctly. By leveraging tools like SLATs, GRATs, and sales to IDGTs, business owners can significantly enhance their ability to transfer wealth to future generations while minimizing tax burdens.  

The key is to start planning early. To get started, check out our free guide, “Smart Strategies for Maximizing Generational Wealth” at bit.ly/max-gen-wealth.

Once you understand the basics of what needs to be done, work with a knowledgeable financial advisor to create a comprehensive strategy tailored to your unique situation. At WHZ, we are committed to helping business owners achieve financial success with “Absolute Confidence. Unwavering Partnership. For Life.” Contact us for a complimentary consultation to learn more about how we can support you on your journey to greater profitability and growth. 

Authored by Principal/Managing Partner & Chief Goal Strategist James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. WHZ Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.