Week 10: Trust Fundamentals Most People in PE Never Fully Understand
We've covered debt, insurance, and gifting so far in this series. This is the last piece: what happens once that wealth lands on your balance sheet as real, spendable dollars.
For most people in this business, the first fund's distributions go to the predictable things. Paying down the line of credit that funded a few years of capital calls. Building the liquidity cushion this whole series has been pointing toward. The second fund's distributions start moving toward the life you actually want, the second home, the tuition, whatever's been sitting on the list.
But at some point, if the fund performs, distributions start outpacing what you actually need to live the life you want. That's the moment the irrevocable trust conversation becomes relevant, not before. Revocable trusts and powers of attorney are a different conversation, worth having regardless of where you are in the distribution cycle.
Since the terms get thrown around loosely, I wanted to give you a quick rundown of the basics.
A trust is simply a legal document that governs how those assets are managed during your lifetime and after death.
Some general terms to be aware of:
Grantor = the person contributing the assets into the trust
Trustee = the person responsible for managing and caring for the assets put into a trust
Beneficiary = the person(s) that the assets are meant to support
Common trusts break down along two lines:
Revocable
Irrevocable
A revocable living trust is usually the most common. It keeps you in control, keeps your affairs private instead of running through probate, and gives you a mechanism for someone to step in if you're ever incapacitated. This does not require giving anything up.
Irrevocable trusts are a different tool entirely. You're moving assets out of your estate on purpose, not just managing them. That usually means giving up some control in exchange for tax benefits and creditor protection.
But that gifting counts against your lifetime exemption. There are many types of irrevocable trusts, each built for a different goal.
The biggest thing to keep in mind with irrevocable trusts: they're irrevocable. These are planning decisions that aren't meant to be made lightly, and they're often fairly confusing. You need to really understand what you're doing, what you're trying to accomplish, and the concessions you're making. They can be expensive to set up and to maintain. Trust tax rates are also compressed compared to individual and joint filings, meaning a trust hits the top bracket at a much lower income level than you would personally.
A few names come up most often: SLATs, GRATs, ILITs. Each is built to solve a different problem, spousal access, concentrated appreciating assets like carry, keeping life insurance outside your estate, and the right one depends entirely on what you're actually trying to accomplish.
You've probably also come across terms like South Dakota trusts, PTET, or vertical slice structures, more advanced strategies that show up in the news and in conversations with peers. Some of these draw more scrutiny than others and may shift as the law develops, not just more complex versions of the basics above.
None of these, from SLATs and GRATs to the more advanced strategies above, are plug and play. Each comes with its own tax, legal, and state specific requirements, and what works for one fund structure or family situation can be the wrong call for another. Work through the details with your attorney and CPA before acting on any of it.
I've been thinking about putting together an event with an estate planning attorney in a few cities, to go deeper on these instead of just name dropping them. If that sounds useful, shoot me a quick email so I know where to prioritize.
One more term worth understanding is grantor trust status. With a grantor trust, the grantor, not the trust, pays the income tax on the trust's earnings. In practice, that means the tax bill comes out of assets outside the trust, which some view as an indirect way of moving additional value out of the estate without using any gift or estate tax exemption. It's one of the more commonly discussed features of irrevocable trust planning, and worth understanding before that conversation with your attorney.
There are tons of structures to consider, and the right one depends on your fund terms, your state, your family situation, and how concentrated your estate already is in illiquid carry and co-invest. This is one of those areas where a good estate planning attorney earns their seat at the table. If you haven't had this conversation yet, now's the time, while distributions are still coming in and there's still room to build this the way you want.
The takeaway is less about the document and more about making sure your tax advisor, your attorney, and your own goals for your family are all working off the same plan, and building something that's actually intentional instead of reactive. The document itself is what the experts are for.
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