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First off, let me add a disclaimer that I’m not an estate planning attorney or CPA and that everyone should seek counsel from one for your own unique circumstances.  The information herein is for information purposes only. 


As the election and 2021 nears, we are all aware there may be a change in administration and with that, a potential change in estate tax law (amongst other things). 

Now, BDIT’s (pronounced bee-dit), AKA 678 trusts, are currently very popular due to their flexibility to freeze the value of an asset or one’s estate.  In most trusts, the person setting them up (grantor) typically gifts something of value for the benefit (beneficiary) of a spouse, children, charities and other people.  There are countless trusts and estate planning techniques with fun acronyms such as IDGT, BDIT, CLAT, SLAT, CRT, etc.  
Joe Biden, if elected, has stated he wants to limit the use of installment sales to trusts, which is a technique several of my clients have used in the past.  The trust we typically use is a BDIT/678 trust for a variety of reasons.  The way this trust works is as follows:

  1. a parent or loved one creates a trust and deposits $5K into it.  They are the grantor
  2. You become the trustee and beneficiary of this trust and waive your right to withdraw the $5K
  3. In doing this, the taxes from the trust flow to YOU, the trustee and beneficiary.
  4. We obtain a valuation on your private company stock and your trust buys the shares from you in return for a promissory note at the applicable federal rate (AFR).
  5. some time later on the company is sold and your trust receives all the proceeds.  The trust then pays you back for the promissory note plus interest
  6. you personally use the promissory note proceeds plus interest to pay any capital gains tax due on the sale of your shares
    • one benefit of the installment sale is it preserves QSBS
  7. if done properly, you’re left with a lot of money in your BDIT trust outside of your estate and creditor protected.

So using real world examples, dad or mom sets up the trust for you and deposits $5K.  We obtain a valuation for gift purposes on your company’s shares saying they’re worth $10MM.  It’s possible that the valuation is lower than what you believe they’re actually worth and in a lot of cases this is true since you’re able to take minority ownership and illiquidity discounts.  The trust buys the shares from you and hands you a promissory note for 15 years with interest at the AFR which is currently under 2%.  Under the terms on the note, the interest and principal are due at maturity only.  Any interest eventually paid to you is income tax free since the trust is a disregarded entity for tax purposes anyway.


3 years go by and the company is sold and your shares are worth $50MM.  The buyer pays your trust $50MM since the trust is the official owner of the stock.  With $10MM of QSBS exemption, $40MM are exposed to federal taxes at around 24%.  The trust is considered a disregarded entity so all taxes present and future flow to you personally.  So you would owe approximately $9.6MM in taxes ($50MM – $10MM QSBS exemption * 24%).  Assuming we decided to pay back the installment note, the trust would pay you $10.6MM (assuming 2% interest for 3 years).  You would then pay capital gains tax of $9.6MM out of your $10.6MM in your name, leaving yourself with only $1MM outside of the trust.  That would also leave $39.4MM in your trust ($50MM – $10.6MM for installment note payback).  
The benefit of having these assets now in your trust is that all of the growth won’t be subject to estate taxes for your heirs as well as protection against potential creditors.  If these assets grow to $100MM at your death, it would have saved your heirs a minimum of $31MM had these monies been in your name. 

Whether this is structure is a fit depends on:

  • your complexity tolerance since this will take mindshare to create and reliance on someone like myself and an attorney to maintain
  • you see the value in protecting assets from creditors
  • seeing value in shielding assets from estate tax for future generations
What these trusts are not

This trust is not going to help you reduce capital gains tax or ordinary income.  Since it’s like a disregarded entity for tax purposes, all tax due will flow to you, the trustee, personally.  So for income and capital gains tax, this trust is neutral

If you’re interested in starting a dialogue and learning how we can help, please contact us.

Best Regards,

Jared Toren
CEO & Founder

Proper Wealth Management’s (“Proper”) blog is not an offering for any investment. It represents only the opinions of Jared Toren and Proper . Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. Jared Toren is the CEO of Proper, a Texas based Registered Investment Advisor.   All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Information contained herein is believed to be accurate, but cannot be guaranteed. This material is based on information that is considered to be reliable, but Proper and its related entities make this information available on an “as is” basis and make no warranties, express or implied regarding the accuracy or completeness of the information contained herein, for any particular purpose. Proper will not be liable to you or anyone else for any loss or injury resulting directly or indirectly from the use of the information contained in this newsletter caused in whole or in part by its negligence in compiling, interpreting, reporting or delivering the content in this newsletter.  Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. The material contained herein is subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Proper may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. Proper Wealth Management is not responsible for any errors or omissions or for results obtained from the use of this information. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this material should not be acted upon without obtaining specific legal, tax or investment advice from a licensed professional.

Author: Jared Toren

Jared Toren is CEO and Founder at Proper Wealth Management. Proper was born out of frustration with the inherent conflicts of interest at big brokerage firms influencing advisors to sell products that were not suitable for clients but profitable to the firm along with a consistently mixed message of who’s interest was supposed to be put first; the clients’, the firms’, shareholders or advisors. At Proper, our clients interests come first. We are compensated the same regardless of which investments we utilize so there’s no incentive for us to sell high commission products. Since we focus on a small number of clients, we are able to truly tailor our advice to each person’s unique circumstances.
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