Estate Planning Tip: Planning for Estate Taxes and Income Taxes on Business Earnings

When creating a trust to hold a business interest it is important to determine where the money will come from to pay the income taxes associated with the profits of the business allocated to the trust. Sometimes the trust instrument is drafted in such a way that the trust legally owns the business interest but the original grantor of the trust is the “deemed owner” for income taxes purposes only. This is common estate planning technique. The value of the business interest is removed from the grantor’s estate for estate tax purposes and the trust assets are not used to pay the income taxes on the profits. In this situation, the original owner is responsible to pay the income taxes but the trust legally owns the business interest.

Since the trust legally owns the business interest, the trust would be entitled to any distributions from the business not the grantor. The grantor would not be entitled to any funds from the business to pay the income taxes. Proper planning is needed to determine how the income taxes will be paid.

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Alan J. Pecora, CPA, Esq. is a principal in our tax department with more than 22 years experience in the estate & trust area. Alan joined Insero & Co. in 1999 after practicing with various law firms. He concentrated his law practice in the areas of estate & trust administration and tax law. Alan is also a member of the Estate Planning Council of Tompkins County. Alan holds a Bachelors degree in business administration with a concentration in accounting from St. Bonaventure University. He obtained his law degree from Seton Hall Law School. Alan is a Certified Public Accountant in New York, a member of the Monroe County Bar Association, Trust & Estate Section and a member of the Estate Planning Council of Rochester. Contact Alan at 585-697-9612 or alan.pecora@inserocpa.com.

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Posted in Business Updates, Estate Planning

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