Trust and estate planning tends to involve people nearer to the end of their lives who want to take care of their children and spouse once they are gone. But what about when the client is young, single and childless? A pair of speakers at the FAE's Trust and Estate Taxation Conference said that even in these cases, there's much that can be done for such a client. 

Michael S. Arlein, a partner at Patterson Belknap, said his typical clients tend to be in the startup world, many of them in the tech sector, and tend to very different circumstances from the more typical trust and estate planning clients. 

"Traditional estate planning is focused on estate and gift tax where the main goal is to transfer wealth that won't later be subject to tax. Here, death is often something far off in the future for someone who is 25, 30 years old," he said. 

These sorts of clients tend to be less interested in using trusts to avoid income tax, especially given that that their wealth has typically been accumulated in a short amount of time and tends to be concentrated in a small number of stock positions, sometimes just their own company's. Most of the time such clients approach his firm when there's what he said is a "looming liquidity event" like an upcoming IPO, things that can happen "in light speed" relative to other clients' activities. 

"This is not the company that was founded three generations ago, it was founded three years ago and will liquidate for $200 million in 6 months. Or at least that's the hope," he said. 

Much of the strategy in situations like this center around tax exemptions for qualified small business stock  (QSBS). Brian M. Sweet, counsel at Patterson Belknap and another of the speakers, said that for stock to count for the QSBS exemption, the company must be a C corporation, which most startups are, the taxpayer has to have acquired the stock directly from the company in the original issuance, the company itself cannot have assets of more than $50 million at the time, and at least 80 percent of those assets must have been used in the act of business. 

If a stock qualifies as a QSBS, then there is a maximum $10 million exclusion from capital gains for federal income tax purposes, and Sweet added that states, with the exception of California and Pennsylvania, follow the federal treatment on this as well. To get the maximum exclusion, typically, one needs to have held onto the stock for at least five years, and it has to have been acquired after 2010. Sweet noted that the exclusion applies taxpayer by taxpayer so if a company has multiple founders, each can theoretically take advantage of the fill exclusion amount. 

Arlein said non-grantor trusts can multiply the exemption even further by gifting it QSBS stock. Once the gift is made, the trust will have its own separate QSBS exemption yet retain the same holding period as the founder, meaning it won't need to wait five years to get the full exclusion amount. If one has children, one might opt to have them be the main beneficiaries, as this will pass the exemption on to them, but he said a lot of his younger clients don't have children yet. In such cases, what can be done? He said in such cases it is possible to create a trust to the benefit of future children, but that this trust will need a placeholder beneficiary (like a parent or a sibling) until an actual child comes into existence. But he also said that other founders simply don't plan on having children and so ask him "how do I make a trust for the benefit of myself and get some tax benefits?"

In these cases he said he sometimes turns to what he calls a parent-seated trust. With these trusts, he will go to the founder's parents and ask them to create a dynasty trust for the benefit of their child, the founder, and fund a nominal amount from their own money. The rest of the trust, though, will be filled with stock from the founder, which then generates its own QSBS exemption, and is then structured to avoid state level taxation. The founder has no control over the trust itself, because that would make it a grantor trust and thus lose out on the tax benefits, but they can still derive income from it. 

"That trust is pretty amazing because it's not in the founder's estate, it can pass on to the founder's children and grandchildren... [and] it's credit protected vis a vis the founder, and it has these tax benefits," he said. 

So while such clients tend to require slightly different techniques than what's typical for trust and estate work, Arlein said they can be very rewarding engagements. He added, too, that they tend to also be very good at referring each other, as they network often and share information, and so recommended that professionals do what they can to get into this space.