As a founder, you likely plan your business strategy months or years in advance. Applying that same foresight to your personal finances can help you manage growing wealth, support your long-term goals as an owner and build a lasting legacy.
One often overlooked wealth strategy is asset location: deciding where to hold specific investments based on the tax treatment of different accounts, entities and trusts. Not to be confused with asset allocation, which focuses on balancing risk and return across asset classes, asset location focuses on placing assets in structures that may provide more favorable federal income, gift and estate tax treatment.
For founders, asset location can be especially important because wealth is often concentrated in company stock, business interests or other assets with significant appreciation potential. This approach may help reduce tax drag, preserve more after-tax wealth and create flexibility for future family and philanthropic goals.
How can founders use asset location to preserve wealth?
Asset location can help founders match each investment with the account or trust structure best suited to its tax profile and long-term purpose. Because different structures are taxed differently, where an asset is held can meaningfully affect after-tax outcomes.
Generally, tax-advantaged accounts may be appropriate for investments that can create more frequent tax bills, such as actively managed equity funds that buy and sell often, or taxable bonds that pay regular interest. Holding these investments in a tax-advantaged account may help reduce or delay those taxes, giving more of the investment’s return a chance to stay invested and potentially grow. Meanwhile, certain trusts may be useful for high-growth or highly appreciated investments, particularly when founders want to manage how those assets are transferred, taxed or used to support family and philanthropic goals.
With asset location, the goal is not simply to reduce taxes on each asset in isolation. Rather, it is to be intentional about where different assets are held, so the structure matches the asset’s tax treatment, growth potential and purpose within your broader wealth plan. As those choices become more complex, trusts can play a central role in connecting asset location with broader estate planning goals, from transferring wealth to beneficiaries to supporting philanthropy.
What is a trust in estate planning and when do I need one?
A trust is a legal structure that holds and manages assets for beneficiaries according to the terms you set, often helping with estate planning, tax planning and wealth transfers. You may want to consider a trust early on in your legacy planning process as it can give you more control over how assets pass to family, business successors or charitable organizations.
How can founders use trusts to pass on appreciating business wealth while potentially reducing taxes?
For founders, trusts can be an important part of aligning their business’ success with their long-term family and legacy goals. In particular, irrevocable trusts, which cannot be easily amended or revoked, may allow you to permanently gift assets to beneficiaries and potentially reduce federal estate and gift taxes.
The right trust structure depends on your objectives, the type of assets you hold and who you want to bear the federal income tax liability. Here are two options:
- A non-grantor trust is one route: The trust itself or its beneficiaries are generally responsible for federal income taxes. This structure may help manage a founder’s overall federal income tax exposure. For founders with qualified small business stock (QSBS), a non-grantor trust may also help facilitate “stacking,” or spreading the QSBS tax exclusion across multiple taxpayers, because the trust is treated as a separate taxpayer and may hold QSBS that could potentially qualify for its own capital gains exclusion.
- A grantor trust works differently. In this structure, you, as the grantor, generally pay the federal income taxes on trust income. That can allow the trust assets to potentially grow without being reduced by federal income taxes paid from the trust itself, which may be advantageous for beneficiaries. For asset location purposes, grantor trusts may be well-suited for assets expected to appreciate meaningfully, such as early-stage company shares. For founders whose wealth is tied to assets expected to appreciate significantly, a grantor retained annuity trust (GRAT) is another option to consider because it may allow remaining appreciation to pass to beneficiaries free of federal gift and estate tax.
How do GRATs work and when are they used in estate planning?
A GRAT allows you to transfer assets to a trust while receiving annuity payments back over a set term. GRATs are often used when a founder expects assets, such as company shares or business interests, to appreciate significantly, because any remaining value may pass to beneficiaries free of federal gift and estate tax if the trust is structured properly.
For founders, timing can be especially important. Placing assets in a GRAT before a major growth milestone, fundraising round or liquidity event may help shift a portion of that appreciation to family members or other beneficiaries.
But not every founder’s estate planning goals are limited to family wealth transfer. For those who also want to incorporate philanthropy, a charitable trust may offer a way to use appreciated assets to provide income during life while leaving remaining assets to charity.
How does a charitable remainder trust work and when does it make sense for estate planning and charitable giving?
A charitable remainder trust (CRT), is an irrevocable trust that can turn appreciated assets, such as company stock or business interests, into an income stream for you or other beneficiaries, with the remainder going to charity. For founders, a CRT may make sense before a liquidity event when philanthropy is a core and you are looking to diversify concentrated wealth while managing potential tax exposure and creating a future charitable gift.
Contributing eligible business interests to a CRT before a binding sale agreement is finalized may help defer capital gains taxes, generate an upfront federal income tax deduction and reduce estate taxes. After a sale, the CRT may reinvest the proceeds in a diversified portfolio, using the trust’s federal-income-tax-exempt status to support long-term growth. This can help turn a large, concentrated holding in your business into a more diversified source of income and future charitable support.
How does a charitable lead trust help founders support charity and transfer wealth to family?
A charitable lead trust (CLT) may appeal to founders who want to make charitable giving a priority while still preserving a path to transfer wealth to beneficiaries. With a CLT, the trust makes payments to selected charities for a set period. When that period ends, any remaining assets may pass to beneficiaries, potentially with reduced federal gift or estate tax exposure if the trust is structured properly. This structure may be especially useful for founders who want their charitable giving to begin now while allowing future asset growth to support broader wealth transfer goals.
How can Morgan Stanley Financial Advisors help founders plan for their legacy?
Morgan Stanley Financial Advisors can help founders evaluate how asset location, trust strategies and other estate planning tools may work together to support your business, family and philanthropic goals. That may include identifying which assets are best suited for taxable accounts, tax-advantaged accounts or trusts, depending on their tax profile and long-term purpose.
The good news is you don’t have to do this alone. Your Morgan Stanley Financial Advisor can talk you through which strategies make sense for your financial situation. By taking the time to create your financial plan, you will have a roadmap for what’s ahead—even if you can’t see around the corner just yet.
To learn more, ask your Financial Advisor or Morgan Stanley representative for a copy of the Global Investment Office report, “A Good Match? Marrying Wealth Structuring and Investment Selection Decisions.”
