The Tax Trifecta Trust: How Business Owners Are Saving Hundreds of Thousands in Taxes

The recent tax law changes have fundamentally shifted the planning landscape for business owners, opening up income tax optimization opportunities that didn't exist before.

Enter the Tax Trifecta Trust – a strategy that combines multiple tax benefits into one powerful approach that could transform your tax situation.

Understanding the Opportunity

To appreciate why this strategy is so powerful, consider that most successful business owners face a perfect storm of tax challenges:

Federal tax rates up to 37%
State income taxes that can add another 5-13%
Limited SALT deductions
Phase-outs of valuable business deductions
Significant capital gains upon sale

The Tax Trifecta Trust addresses all of these simultaneously.

The Five Key Benefits Explained

1. Income Shifting to Lower Brackets

Let's walk through a real example. Consider Tom, who owns a business generating $800,000 in annual income. Tom is in the 37% federal bracket, paying $296,000 in federal taxes alone.

Tom creates five non-grantor trusts for his five adult children. He transfers income-producing assets to these trusts, shifting $100,000 to each trust. The trusts distribute this income to his children, who are all in the 22% bracket.

The math:

Tom's tax on $500,000: 37% = $185,000
Children's combined tax on $500,000: 22% = $110,000
Annual savings: $75,000

2. SALT Deduction Multiplication

Here's where it gets interesting. Each trust gets its own $40,000 SALT deduction (state and local tax deduction).

Example: Sarah owns a manufacturing business in a state with 7% income tax. She's already maxed out her personal SALT deduction. Sarah creates four trusts for her four children.

The impact:

4 trusts × $40,000 SALT deduction = $160,000 in additional deductions
At her 37% federal rate, this saves her $59,200 annually

3. Preserving Section 199A Deductions

The Section 199A deduction gives business owners a 20% deduction on qualified business income, but it phases out at higher incomes. For trusts, the phase-out begins at $197,300.

Real-world example: Michael has a consulting firm with $800,000 in qualified business income. At this level, his Section 199A deduction is completely phased out.

Michael's solution:

Creates three trusts, keeping $200,000 for himself
Each entity (Michael plus three trusts) has $200,000 of income
Each qualifies for the full 20% deduction = $40,000 deduction per entity
Total deductions: $160,000 vs. $0 before
Tax savings at 37% rate: $59,200 annually

4. State Tax Elimination

This is often the biggest win. By establishing trusts in states with no income tax (like Nevada or South Dakota), you can eliminate state taxes on trust income.

Example: Jennifer runs a successful e-commerce business in California, where the top tax rate is 13.3%. She creates a Nevada-based non-grantor trust for her children, transferring assets generating $500,000 in annual income.

Annual state tax savings: $66,500

5. Qualified Small Business Stock (QSBS) Stacking

When selling a business that qualifies for QSBS treatment, each taxpayer can exclude up to $15 million in gains from federal tax.

Consider this scenario: Robert started a tech company five years ago. It's now worth $30 million.

Without planning: Robert can exclude $15 million, paying tax on the other $15 million = $3.57 million in taxes.

With planning: Before the sale, Robert transfers half the stock to a non-grantor trust for his children. Both Robert and the trust can now exclude $15 million each = $0 in federal taxes on the sale.

Savings: $3.57 million

The Power of Stacking: A Complete Example

Let's see how these benefits work together with a comprehensive example:

The Situation: David and Lisa own a property management company with 50 rental properties generating $2 million in annual income. They have four adult children and eight grandchildren. They're paying approximately $740,000 in combined federal and state taxes annually.

The Strategy: They create 12 non-grantor trusts (one for each child and grandchild) in Nevada. Each trust receives interests in properties generating approximately $165,000 in annual income.

The Results:

Income Shifting: Income distributed to children and grandchildren in lower brackets saves $150,000 annually
SALT Multiplication: 12 trusts × $40,000 = $480,000 in total SALT deductions (vs. their previous $40,000), saving an additional $162,800
Section 199A Preservation: Each trust stays under the phase-out threshold, preserving deductions worth $118,400 in tax savings
State Tax Savings: Nevada trusts eliminate state taxes on non-California sourced income, saving $130,000

Total Annual Savings: $561,200

Implementation Considerations

While the benefits are substantial, proper implementation is crucial:

Trust Structure Options:

Incomplete Gift Non-Grantor Trusts (INGs): Best for those who want to retain more control and get a basis step-up at death
Completed Gift Trusts: Better for those also concerned about estate taxes
Spousal Trusts (SLANTs): Include spouse as beneficiary with certain restrictions

Important Details:

Each trust needs sufficient income to justify the administrative costs
Trusts for different beneficiaries are less likely to be challenged by the IRS
Some strategies work better for certain types of businesses
State tax savings depend on your home state's rules

Is This Right for Your Business?

This strategy tends to work best for:

Business owners with $500,000+ in annual income
Families with children or grandchildren who could benefit from distributions
Owners of multiple entities or rental properties
Anyone losing deductions due to income phase-outs
Business owners planning to sell in the next 3-5 years

The Tax Trifecta Trust isn't just about reducing taxes – it's about keeping more capital in your business and family while building generational wealth.

Take the Next Step

Every business situation is unique, and implementing this strategy requires careful planning tailored to your specific circumstances. The difference between optimal tax planning and accepting the status quo could mean hundreds of thousands of dollars annually.

Ready to explore how the Tax Trifecta Trust could transform your tax situation?

Book a consultation with our team.

We'll analyze your specific situation and show you exactly how much you could save.

Note: Tax strategies should always be implemented with professional guidance to ensure compliance with current regulations and optimization for your specific situation.

R Jason Griffin | Sep 08 2025 16:37