Estate Planning for Founders: Protecting Your Family and Your Equity
Nobody wants to think about worst-case scenarios. But founders with significant equity should plan for the unexpected. Proper estate planning protects your family and can save millions in taxes.
Why Estate Planning Matters
Founders have unique estate planning needs. Your equity is illiquid, your company may have complex structures, and your net worth can change dramatically overnight. Estate planning is a critical part of founder personal finance.
The Stakes
Estate Tax Exposure
Federal estate tax is 40% on estates over $13.6M (2024). Without planning, a significant exit can create a huge tax bill for heirs.
Liquidity Challenges
Your estate may owe taxes on illiquid stock. Without cash, heirs may be forced to sell shares at fire-sale prices.
Family Protection
Who controls your shares if something happens? Who makes decisions about your company ownership?
Business Continuity
Your company needs certainty about who owns shares and how voting rights transfer.
The Cost of Not Planning
Without a will, state law determines who inherits your assets. Without trusts, your equity may pass through probate (public and slow). Without proper structure, 40% of your estate above the exemption goes to taxes.
Essential Documents
Every founder should have these basic estate planning documents, regardless of current net worth.
Core Documents
Will
Specifies how assets are distributed, names guardians for minor children, and appoints an executor. Without one, state law decides everything.
Revocable Living Trust
Avoids probate, provides privacy, and enables smooth asset transfer. You control assets during life; they transfer seamlessly at death.
Power of Attorney
Designates someone to make financial decisions if you're incapacitated. Critical for managing company matters if you can't.
Healthcare Directive
Specifies your healthcare wishes and designates someone to make medical decisions if you can't. Includes living will provisions.
Life Insurance
Consider term life insurance to provide liquidity for estate taxes and family needs. The policy can be owned by an irrevocable life insurance trust (ILIT) to keep proceeds out of your taxable estate.
Equity Transfer Strategies
The biggest opportunity in founder estate planning is transferring equity while valuations are low. This locks in current values for gift/estate tax purposes while future appreciation passes to heirs tax-free. Combined with QSBS planning, this can dramatically reduce your family's tax burden.
Common Strategies
Gifting During Life
$18K annual exclusion per recipient (2024). $13.6M lifetime exemption. Gift low-value shares now; appreciation is tax-free to recipient.
Grantor Retained Annuity Trust (GRAT)
Transfer appreciation to heirs with minimal gift tax. Works well for assets expected to appreciate significantly.
Intentionally Defective Grantor Trust (IDGT)
Sell shares to trust for a note. Future appreciation passes to beneficiaries. You pay income tax on trust earnings.
Family Limited Partnership (FLP)
Transfer shares to FLP, gift limited partnership interests. Valuation discounts may apply for lack of control and marketability.
Timing Matters Enormously
Gift $1M of shares at seed stage when they're worth $0.001 per share. If those shares become worth $50M at exit, you've transferred $50M to heirs with minimal gift tax impact. This only works if you plan early.
QSBS Stacking
Estate planning and QSBS can work together. Gift shares to family members early; each can potentially claim their own $10M QSBS exclusion on exit. Proper planning can multiply tax benefits.
When to Plan
Planning Triggers
Working With Professionals
- Estate planning attorney: Creates documents and structures. Should understand startup equity.
- Tax advisor: Models tax implications of different structures. Coordinates with estate plan.
- Financial advisor: Helps with overall wealth management and insurance needs.
- Review annually: Plans need updating as laws change and circumstances evolve.
Need Help With Estate Planning?
Eagle Rock CFO helps founders coordinate estate planning with overall financial strategy.
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