Estate Tax Planning for Founders

Most founders do not think about estate planning early enough.

That is understandable. You are focused on building product, hiring, fundraising, and getting to liquidity. Estate planning feels like something to handle later.

But for founders, later is often when the best planning moves are already behind you.

Startup wealth compounds differently. A concentrated position in private stock can become meaningful very quickly. When that happens, the cost of waiting shows up fast: estate tax exposure, missed trust strategies, inefficient transfers, and unnecessary complexity for your family later.

At Rally, we think estate planning should be treated the same way founders treat cap tables and tax strategy: as design, not paperwork.

Done well, estate planning can help you preserve more of what you are building, protect your family, and create a cleaner path for transferring wealth across generations.

Estate planning is about maximizing what actually reaches your family, heirs, or charitable goals by minimizing tax leakage and structuring risk.

For founders, that matters because wealth is often concentrated in assets like:

At a high level, the federal estate tax applies to assets a person leaves behind at death. For U.S. citizens and residents, that can include worldwide assets. Large estates may face a 40% federal estate tax, and depending on the state, the combined burden can be even higher.

There are a few major exceptions. Transfers to a U.S. citizen spouse are generally not taxed at the first death. Transfers to charity are generally not taxed. And each person has a lifetime exemption amount that shields a substantial amount of wealth.

Most people never need advanced estate planning. But founders are not on a normal wealth curve. One liquidity event can move a family from “not relevant yet” to “this needs immediate attention.”

That is why the best estate planning often happens before full liquidity, not after.

Most advanced estate tax planning revolves around irrevocable trusts.

The core reason is simple: the right trust can move future appreciation outside of your taxable estate. For founders, that is where the leverage is. The value is not just what the asset is worth today, but what it may be worth later.

If you can transfer the right asset into the right structure at the right time, the long-term tax savings can be substantial.

An IDGT is an irrevocable trust designed to remove assets from your estate for estate tax purposes while still having you pay the income tax on the trust’s earnings.

That may sound strange, but it is what makes the structure powerful.

Because you continue paying the tax personally, the trust assets can keep compounding without being reduced by those tax payments. In effect, you move appreciating assets out of your estate while further shrinking your taxable estate by covering the tax yourself.

An IDGT is often used when a founder expects their estate to exceed the estate tax exemption or believes certain assets may appreciate significantly over time.

Rally take: For founders holding high-upside assets, an IDGT is often one of the highest-leverage estate planning tools available

A Non-Grantor Trust is treated as a separate taxpayer from the person creating it.

That distinction makes it relevant not only for estate tax planning, but also for certain state tax and QSBS-related strategies.

A non-grantor trust is typically used when the goal is full separation from the trust for both estate and income tax purposes.

• Moves assets and future appreciation outside the estate

• Can create state income tax planning opportunities in the right structure

• May support advanced QSBS planning

• Can improve asset protection and multigenerational planning

• The grantor generally gives up access to the assets

• The spouse usually cannot be a beneficiary in the same way as under a SLAT

• Federal trust tax brackets become punitive quickly

• Ongoing administration matters

• It requires precise planning, especially when startup equity is involved

Rally take: For founders with meaningful private-company wealth, non-grantor trusts are often where estate planning starts to overlap with advanced exit planning.

A SLAT is a trust created by one spouse for the benefit of the other spouse, usually with children or descendants included as beneficiaries too.

This is often one of the most practical trust strategies for married founders because it offers estate tax reduction while preserving indirect household access to the assets.

A SLAT works well when a married couple wants to remove assets from the estate without feeling like the assets are completely gone.

• Moves appreciation outside the estate

• Preserves indirect access through the beneficiary spouse

• Can provide asset protection

• Lets the grantor keep paying trust income tax in many structures

• It generally must be funded with separate property

• It is irrevocable

• Indirect access depends on the marriage remaining intact

• The grantor usually does not directly control the trust

Rally take: For married founders, a SLAT is often one of the most practical starting points because it balances tax efficiency with real-world flexibility.

An ILIT is a trust designed to own life insurance outside of the insured person’s taxable estate.

For founder families, this is usually less about maximizing upside and more about solving for liquidity.

An ILIT is useful when a family expects estate tax exposure and wants life insurance proceeds to stay outside the estate while also creating liquidity for heirs.

Why founders use it

• Keeps insurance proceeds outside the estate

• Creates liquidity for taxes, expenses, or family support

• Helps reduce pressure to sell illiquid assets at the wrong time

• Can support long-term family planning

• Premiums need to be funded consistently

• The structure is irrevocable

• The grantor usually does not retain direct control

• Insurance strategies require ongoing maintenance

Rally take: ILITs are often overlooked by founders, but they can be one of the cleanest ways to solve estate liquidity without compromising core assets.

A Crummey Trust allows gifts to an irrevocable trust to qualify for the annual gift tax exclusion, assuming the trust is structured properly.

This is usually less of an aggressive founder planning move and more of a disciplined long-term gifting strategy.

A Crummey Trust is useful for families that want to transfer wealth over time without making large one-time transfers.

• Supports recurring gifting in a tax-efficient way

• Keeps assets in trust instead of making outright gifts

• Can create more control and protection for beneficiaries

• It is irrevocable

• It comes with administrative requirements

• It is usually less compelling for smaller illiquid assets that require expensive valuations

Rally take: Crummey trusts are usually not the first vehicle founders think about, but they can work well alongside larger family wealth-transfer strategies.

A GRAT is a trust designed to transfer future appreciation on assets to beneficiaries with minimal gift tax cost.

This is often attractive when an asset has meaningful upside potential.

A GRAT is commonly used when the goal is to transfer appreciation while allowing the grantor to retain annuity payments for a set period.

• Efficiently shifts appreciation if the asset outperforms IRS assumptions

• Can work especially well with volatile assets

• Offers asymmetric downside if the asset underperforms

• Allows the grantor to retain annuity payments during the term

• Less effective for generation-skipping transfer planning

• Can be harder with illiquid or hard-to-value assets

• Repeated valuations may be required

• If the grantor dies during the term, some intended benefits may be lost

Rally take: A GRAT can be especially compelling when a founder wants a more surgical strategy focused specifically on transferring appreciation.

There is no single best trust.

The right structure depends on your balance sheet, how much of your wealth is tied up in company equity, whether liquidity is near or far, whether QSBS is part of the picture, whether you are married, and how much access or flexibility you want to preserve.

A simple way to think about it:

For founders, the planning window can open earlier than expected because startup wealth can grow so quickly.

When should a founder start estate planning?

Usually earlier than feels intuitive. The best planning often happens before a major liquidity event, while asset values are still relatively low and there is more flexibility.

Which trust is best for startup equity?

There is no universal answer. It depends on the stage of the company, expected appreciation, whether QSBS applies, your liquidity needs, and your family situation.

Can I still access the assets after I transfer them?

Sometimes indirectly, depending on the structure. For example, a SLAT may allow indirect household access through a spouse. Other trusts are far more restrictive.

Do these trusts only matter after I become very wealthy?

Not always. For founders, the relevant question is not just current net worth, but how quickly the value of the company may grow.

Is estate planning just about reducing taxes?

No. It is also about asset protection, family governance, liquidity, and making sure wealth is transferred intentionally rather than chaotically.