Using An Intentionally Defective Irrevocable Trust (IDIT) To Gift Your Family Business


By Robert Pagliarini

When making a gift, sometimes it truly is the thought that counts. If you are considering making a sizable gift to a family member such as a partial interest in the family business, how you structure the transaction can have a meaningful impact on the success of the transfer, minimizing taxes, and the control you have even after making the gift. In my Irvine financial advisory firm, I work with many closely-held family business owners who tend to have two primary questions and concerns. First, they want to make sure their children have the necessary skills and experience to successfully run the business. Second, they want to transfer partial ownership efficiently and in a way that affords them flexibility and helps minimize taxes. In previous Forbes articles I've written about getting the kids ready to take over the business, but in this article I want to explore one strategy that business owners can use to gift closely-held business interest to their children.

When a person decides to transfer an asset to someone, he or she typically envisions making a direct gift to the recipient. Often times, however, both the person making the gift and the recipient may benefit if instead of transferring the asset directly to the recipient, the asset was transferred to a trust for the benefit of the recipient.

Making a transfer in trust can reduce many risks and concerns that the person making the transfer may have. For example, many people are concerned about the recipient using the asset irresponsibly. Others have concerns about the recipient losing the asset, such as through a divorce or to a creditor. These concerns are certainly legitimate, as future events such as legal problems, divorce, or substance abuse cannot be predicted. Transferring the asset to a trust, rather than directly to the recipient, can help reduce many of these concerns because the trust can contain provisions to prevent the beneficiary of the trust from losing the asset. In short, using a trust, rather than making a direct transfer, can provide extremely valuable protection against a number of unforeseen future events that a direct transfer simply cannot.

For assets of significant or unique value, such as an interest in a closely-held business, the additional cost and complexity of making transfers in trust may be outweighed by the benefits, including tax savings.

“When owners of closely held businesses first meet with us regarding succession planning, they typically believe the options for transferring their businesses are limited,” says Derek Early, an attorney for Brown & Streza LLP, “but there are various tools we can use to design and implement a plan to meet a particular owner’s goals and alleviate many of his or her concerns, often with tax savings as an added bonus.”

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