Yes, a Grantor Retained Unitrust (GRUT) can absolutely distribute gains from the sale of trust-held business assets, but the specifics of how and whether it *should* are nuanced and governed by several factors, including the terms of the trust, tax implications, and the overall estate planning goals. A GRUT, unlike a Grantor Retained Annuity Trust (GRAT), allows for fluctuating distributions based on a percentage of the trust assets revalued annually. This flexibility is particularly beneficial when dealing with potentially illiquid assets like a business, or when anticipating a significant event like a sale.
What Happens to the Sale Proceeds in a GRUT?
When a business held within a GRUT is sold, the proceeds become part of the trust’s assets. The trustee then has several options. They can distribute the proceeds to the remainder beneficiaries (those who will ultimately inherit the trust assets), retain them within the trust for future distribution, or a combination of both. The annual unitrust payout is calculated based on the *current* value of the trust assets, including the sale proceeds. Therefore, a sale in a given year would automatically increase the payout to the beneficiaries for that year and potentially subsequent years, depending on how the trustee manages the funds.
Tax Implications of a Business Sale Within a GRUT
The tax implications of a business sale within a GRUT are complex. Because the grantor (the person creating the trust) typically retains certain powers over the trust, such as the ability to replace the trustee or revoke the trust, the sale proceeds are generally considered part of the grantor’s estate for estate tax purposes. However, the GRUT structure can still offer significant estate tax benefits by removing the appreciation of the business from the grantor’s estate. For example, if a business was initially transferred to the GRUT when it was worth $500,000 and then sold for $1.5 million, the $1 million in appreciation would not be subject to estate tax, assuming the trust is properly structured and the grantor does not retain excessive control. Approximately 60% of family-owned businesses fail to successfully transition to the next generation, making proactive estate planning with tools like GRUTs crucial for preserving wealth.
A Story of Timely Planning
I remember working with a client, David, a local business owner who built a successful tech company. He’d established a GRUT years prior to intentionally shield the future appreciation of his business from estate taxes. His daughter, Sarah, was starting her own career and didn’t have the expertise to run the business. A larger company made a generous offer to acquire David’s business. Because of the GRUT structure, the sale proceeds were effectively removed from his estate, and Sarah received a substantial inheritance without the tax burden that would have otherwise applied. This allowed her to invest in her own venture and pursue her passions without the financial strain of taking over the family business. David’s foresight not only preserved his wealth but also ensured a bright future for his daughter.
What if the Planning Wasn’t Done?
Contrast that with the case of Eleanor, who didn’t establish a trust before selling her manufacturing company. She owned the business outright and, upon the sale, the entire gain was considered part of her estate. The estate tax liability was substantial, significantly diminishing the inheritance her grandchildren would receive. Had she utilized a GRUT, a considerable portion of those taxes could have been avoided, preserving more wealth for future generations. It was a difficult lesson for her family, highlighting the importance of proactive estate planning. Approximately 30% of privately held businesses do not have a formal succession plan in place, leaving them vulnerable to such outcomes.
Managing the Trust & California Law
As trustee of a GRUT holding a business, it’s crucial to adhere to the California Prudent Investor Act when managing investments. This act requires trustees to act with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would use. This means diversifying investments, considering the long-term goals of the trust, and regularly reviewing the portfolio. In California, formal probate is required for estates over $184,500. Proper trust planning, like utilizing a GRUT, avoids this expensive process, which can involve statutory fees for executors and attorneys based on a percentage of the estate’s value. Also, remember that all assets acquired during a marriage are community property, owned 50/50, and the surviving spouse receives a “double step-up” in basis for tax purposes.
765 N Main St #124, Corona, CA 92878It is also critical to ensure the trust addresses the management of digital assets, granting explicit authority to a fiduciary to access and manage online accounts. No-contest clauses in trusts and wills are narrowly enforced in California; they only apply if a beneficiary contests the trust without “probable cause.” Finally, if there is no will, the surviving spouse automatically inherits all community property, and separate property is distributed between the spouse and other relatives based on a set formula.
For guidance on establishing and managing a GRUT, or for assistance with estate planning in the Corona area, contact Steven F. Bliss ESQ. at (951) 582-3800.