Fortifying a Founder’s Legacy: Trust Planning Before the IPO

At 32, Claire has built a hugely successful startup in California, now prepping for an IPO. Her stake could soon be worth over $150 million. Estate planning wasn’t on her radar – until she hit the billionaire problem - her attorney opened her eyes to a crucial truth: big exits demand early legacy planning. Let's see how Claire put cornerstone trust strategies in place ahead of her liquidity event, protecting her wealth from future estate taxes and ensuring a lasting legacy.

The Happy Challenge: A Growing Estate (and Looming Estate Tax)

Claire’s rapid success means she’s on track to be extraordinarily wealthy while still young. Yet that success brings potential estate tax exposure that could severely erode the wealth she hopes to pass on someday. Key issues include:

Federal Estate Tax Exposure: U.S. estate tax is 40% on assets above the exemption threshold. Claire’s net worth far exceeds the current federal exemption (approximately $13 million). Worse, this exemption is scheduled to sunset after 2025, dropping by about half (to roughly $6–7 million) in 2026 . That means if Claire does nothing and her assets grow, a huge portion of her estate could eventually be taxed at 40%. She’s essentially on track to make the IRS one of her largest “heirs”

All Wealth in One Basket: Almost all of Claire’s wealth is tied up in her company stock, which is expected to appreciate further post-IPO. While great for growth, this concentration compounds her estate tax problem – all future stock appreciation would just add to the taxable estate if not addressed.

Planning for Future Family: Claire is single with no children (yet). Traditional estate plans typically kick in when one has a spouse or kids. In her case, planning is tricky – she wants flexibility for future heirs, but any moves she makes now have to account for unknowns. A good estate planning plays a good part as a pre-up, without the embarrassment.

The Strategy: Freezing Value and Shifting Growth via Trusts

Working with an estate attorney specializing in entrepreneurs, Claire implements a forward-looking trust plan before the IPO:

1. Gifting Shares to Trusts Early

Claire decides to gift a portion of her pre-IPO shares into an irrevocable trust while the company’s valuation is still relatively low. By transferring, say, 20% of her stock to a trust now (when the per-share 409A value is modest), she “freezes” that portion’s value for estate purposes at the current low figure. All future appreciation of those shares will happen outside her taxable estate. This is powerful: if that 20% stake is worth $5 million today and $30 million in a few years, that $25 million of growth will escape estate tax entirely. She uses a chunk of her lifetime gift tax exemption for this transfer – a resource that’s abundant now but will shrink after 2025 . In doing so, she’s locking in use of the higher exemption while it’s available, potentially saving her family millions in future taxes.

2. Dynasty Trust via Parents

Next, Claire sets up a long-term dynasty trust for her future family. To keep it out of her estate, her parents technically create and fund the trust (with her as beneficiary for now). Claire then transfers a chunk of her shares into it. Because this trust is independent of Claire (a non-grantor trust), those shares and all their future growth are excluded from her estate and even avoid California taxes on sale . The trust can invest or eventually distribute funds to Claire’s future children – giving her flexibility despite not having heirs yet.

3. Basic Estate Plan Documents: Alongside these advanced moves, Claire puts in place a foundational estate plan. She sets up a revocable living trust and will to handle any assets not in the special trusts, ensuring privacy and avoiding probate. She also signs powers of attorney and healthcare directives to cover emergencies. These basics don’t cut taxes, but form a safety net to ensure her affairs are handled according to her wishes (not state default laws) should anything happen.

By acting early, Claire likely saved her heirs tens of millions in future taxes and gained peace of mind. A large portion of her startup equity is now sheltered from estate tax. Her planning is also flexible: the dynasty trust can benefit any children she may have, yet can even provide her with financial security in the meantime. In short, instead of the IRS inheriting a big chunk of her startup success, that value will go to her chosen beneficiaries.

Key Takeaways for Founders:

Leverage Trusts to Shift Future Growth: Irrevocable trusts let you transfer assets now so their future appreciation isn’t hit by estate tax. This is the most powerful way to minimize estate taxes on a rapidly growing asset . In Claire’s case, gifting shares to a trust before the IPO froze their value for tax purposes at a fraction of what they became worth.

Use the 2025 Exemption Window: Take advantage of today’s historically high estate/gift tax exemption before it halves in 2026 . Use it or lose it.

Be Strategic if Unmarried or No Kids: If you’re unmarried or childless, that’s no reason to delay. There are creative techniques (like using placeholder beneficiaries or benefiting yourself through a trust) to ensure your planning is flexible .

Cover the Basics: While implementing advanced trusts, don’t neglect the basics: have a will, revocable living trust, powers of attorney, and insurance. These ensure your wishes are followed and complement the tax-focused strategies.