Estate planning: Trust strategies for preserving and transferring wealth

For wealthy families and business owners, estate planning is more than simply determining who inherits your estate. It’s about developing a strategy to preserve wealth, minimize taxes, protect beneficiaries and help ensure your legacy is transferred as you wish. A well-designed trust strategy can be one of the most powerful tools for accomplishing those goals.

There are dozens of types of trusts, so finding the right trust, or combination of trusts, to best align with your goals can be tricky. Keep reading for a breakdown of estate planning strategies and scenarios in which each can be most beneficial.

The estate tax landscape

Due to the increased wealth transfer tax exemptions, individuals can now pass more assets than ever before without triggering transfer taxes. The federal estate transfer tax exemption allows individuals to transfer up to $15 million and married couples up to $30 million before federal estate taxes apply. Any assets exceeding those thresholds are subject to a 40% federal estate tax.

For that reason, proactive planning is critical for families with substantial estates.

The benefits of a trust

Your family has likely spent decades building wealth, but how much time have you spent planning how that wealth will transfer to your children and grandchildren? Without a coordinated strategy, much of your estate could be lost to taxes, family disputes or subject to inefficient transfers.

Fortunately, trusts provide a flexible way to reduce estate tax exposure while maintaining control over how wealth is distributed. Whether you’re focused on protecting a family business, providing for future generations, supporting charitable causes or creating financial security for your spouse, there are trust options designed to help achieve those objectives.

In many cases, trusts are used to move appreciating assets outside of a taxable estate, helping families lock in today’s value while future growth occurs free of transfer taxes.

Trusts also have benefits beyond taxes, including:

• For liquidity needed to cover estate taxes without forcing a sale of the company.
• To protect assets from creditors, lawsuits or divorcing spouses.
• To ensure heirs receive financial support while avoiding unrestricted access to large sums of money.

Create a trust strategy that fits your needs

The most effective estate plans are customized based on factors such as:

• The size of the estate
• The types of assets owned
• Whether a family business is involved
• Future liquidity needs
• Family circumstances and beneficiary maturity
• Charitable goals
• Tax planning objectives

In many cases, multiple trust structures work together as part of a coordinated estate plan. Different trusts can be used to leverage estate tax exemptions, provide liquidity and preserve wealth for future generations. The key is understanding which tools align with your goals.

Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is one of the simplest and most durable tools in estate planning. The trust owns an insurance policy on the grantor’s life, and because the trust is both the owner and the beneficiary, the death benefit is generally excluded from the insured’s taxable estate when structured correctly.

One of the main benefits of an ILIT is liquidity. Federal estate taxes are generally due within nine months of death. Since most taxable estates include business interests, real estate or other non-liquid assets, an ILIT can provide cash to cover taxes, debt obligations or other estate-related costs without selling valuable assets under pressure.

When an ILIT makes sense

An ILIT can be beneficial for an estate that holds largely non-liquid assets, such as a family business, commercial real estate or a large investment property portfolio. Consider a business owner whose company represents most of their net worth. Upon the owner’s death, the estate could face a significant estate tax bill but have limited cash available to pay it. An ILIT can provide tax-free liquidity to help the estate meet those obligations without selling business interests or taking on debt.

Additionally, in situations where only certain children participate in the business, ILITs can serve as an estate-planning tool to provide equivalent value to non-participating heirs while preserving ownership and control of the business for the children who are actively involved.

Spousal Lifetime Access Trusts

Spousal Lifetime Access Trusts (SLATs) are a popular strategy for married couples seeking to transfer assets from their estates while preserving potential access to trust assets through the beneficiary spouse. One spouse creates and funds an irrevocable trust for the benefit of the other spouse and future descendants. Assets transferred into the trust, along with future appreciation, are removed from both spouses’ taxable estates.

The appeal is straightforward: The donor spouse uses their estate tax exemption to move the assets out of their estate, while the beneficiary spouse may still receive distributions from the trust if needed. This indirect access can make some families more comfortable transferring substantial assets out of their estate.

SLATs do require careful planning. Assets typically must be funded with separate property, and if both spouses establish trusts for each other, the arrangements must be substantially different to avoid IRS scrutiny under the reciprocal trust doctrine.

When a SLAT makes sense

A SLAT is an attractive choice for married couples with valuable estates, but who are hesitant to permanently part with a large portion of their wealth. For example, a couple may want to transfer a diversified investment portfolio expected to grow substantially over the next decade, while maintaining a safety net should their financial circumstances change.

SLATs can also be effective for business owners anticipating significant future growth in their company’s value. By transferring business interests into the trust before a liquidity event, sale or period of rapid growth, future appreciation can occur outside the taxable estate. Because the beneficiary spouse can still receive distributions, the couple retains indirect access to the assets in the event of unexpected expenses.

Intentionally Defective Grantor Trusts

Intentionally Defective Grantor Trusts (IDGTs) are among the most impactful estate planning techniques available to wealthy families and business owners.

An IDGT is irrevocable and designed to remove assets from the grantor’s taxable estate, while grantor trust provisions cause the grantor to remain responsible for the trust’s income tax liability. This means the grantor pays the income tax on trust earnings, allowing the trust assets to grow tax-free. In effect, those tax payments become an additional tax-free transfer of wealth to beneficiaries.

IDGTs are especially powerful when combined with a sale transaction. A business owner may sell shares of a closely held business to the trust in exchange for a promissory note. Because the trust is treated as a grantor trust, the sale generally does not trigger capital gains tax and appreciation above the note’s interest rate can transfer outside the taxable estate.

When an IDGT makes sense

IDGTs are often used by business owners who expect substantial future appreciation in their companies. If a business is valued at $30 million but is projected to double in value over the next decade, selling part of the business to an IDGT can effectively freeze today’s value for estate tax purposes while allowing future growth to benefit children and grandchildren.

This strategy can also work well for families who rely on cash flow from a business or investment assets. Because the grantor receives payments under the promissory note, they can continue to generate income while shifting future appreciation outside their taxable estate.

IDGTs are particularly useful for individuals planning to sell a business, owners of rapidly growing businesses and families whose wealth is expected to appreciate faster than traditional investments.

Dynasty Trusts

Dynasty Trusts are designed to preserve wealth for multiple generations. These trusts use the lifetime gift and generation-skipping transfer (GST) tax exemptions to move assets outside of the transfer-tax system, allowing wealth to grow and benefit children, grandchildren and future descendants.

There are benefits beyond tax savings. Dynasty Trusts can provide significant asset protection by shielding trust property from creditors, lawsuits and divorcing spouses. They can also help families create long-term structures that help ensure beneficiaries manage their inherited wealth responsibly.

When a Dynasty Trust makes sense

Dynasty Trusts are ideal for families focused on multigenerational wealth preservation. A family that has built substantial wealth through a successful business, real estate holdings or long-term investments may want assets to benefit children, grandchildren and beyond without triggering transfer taxes for each generation.

These trusts are also valuable if you are focused on protecting wealth from mismanagement, lawsuits and creditors after it’s been passed down

Charitable Trusts

For families with philanthropic goals, charitable trusts can align giving objectives with tax planning.

A Charitable Remainder Trust (CRT) provides income to the donor or other beneficiaries for a set amount of time, or until the donor passes away. At that point, the remaining assets pass to a charitable organization. This strategy can be particularly attractive when an individual owns highly appreciated assets and wants to defer or minimize capital gains taxes.

A Charitable Lead Trust (CLT) works in the opposite direction. The charitable organization receives payments for a predetermined period and at the end of the term, the remaining assets transfer to family members or other beneficiaries. This structure can help reduce income and/or estate tax liability while supporting charitable organizations during the trust term.

When charitable trusts make sense

A CRT can be an effective solution for a business owner or investor holding an asset with significant unrealized gains. For example, someone who purchased land decades ago for a relatively small amount may face a large capital gains tax bill upon sale. By contributing the property to a CRT, they may receive an income stream while ultimately supporting causes that are important to them.

A CLT may be more appropriate for wealthy families seeking to combine philanthropy with wealth-transfer planning. For instance, a family interested in supporting a university or private foundation for a period of years can use a CLT to make contributions and eventually transfer remaining assets to children or grandchildren at a reduced transfer-tax cost.

Trust comparison chart

Building a coordinated plan

A single trust likely won’t meet all of your estate planning goals. Families and business owners typically combine several strategies that address taxes, liquidity, family dynamics and long-term wealth preservation.

The right balance depends on estate size, asset composition, business ownership, retirement income needs and family circumstances. Estate planning is also not a one-time process. Review your plans every few years or whenever significant life events occur, including:

• Marriage, divorce or remarriage
• Birth of children or grandchildren
• Sale or acquisition of a business
• Major changes in net worth
• Relocation to another state
• Significant changes in tax laws
• Changes in health or retirement plans

How Wipfli can help

Wipfli’s estate planning professionals work alongside attorneys, financial advisors and other specialists to help families evaluate available trust strategies, model potential outcomes and create a coordinated plan aligned with their long-term objectives. Whether you’re preparing for a future business transition, seeking to preserve multigenerational wealth or exploring charitable planning opportunities, our proactive approach can help ensure more of your wealth reaches the people and causes that matter most to you. Start a conversation.

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