What the 30% Trust Tax Means for Founders, Exits and Family Wealth

The proposed 30% minimum tax rate on discretionary trust distributions has generated considerable commentary. Most of it focuses on the income-splitting concern that motivates the proposal. We want to address something the debate is largely missing.

For the founders and private clients, we advise, a discretionary trust is rarely just an income vehicle. It is the structure through which a business is held, proceeds from a sale are managed, and wealth is transmitted to the next generation. The proposed measure, as currently framed, does not distinguish between those two very different uses. That matters, and it matters most at the moment of exit.

Our observations seek to focus on the 30% minimum tax rate on discretionary trust distributions and not focus on the capital gains tax proposed reforms (also highly controversial).

WHAT THIS MEANS FOR FOUNDER-LED TRANSACTIONS

In our M&A practice, a significant proportion of vendor clients hold their business interests through a discretionary trust structure. At the point of sale, the question of where proceeds land, and what tax applies to distributions from those proceeds, is central to deal economics.

Under the proposed framework, a trust holding sale proceeds would be subject to a 30% minimum rate on any distribution to a beneficiary whose marginal rate sits below that threshold. For founders whose post-exit income position changes materially,  as it often does once a business is sold, this creates a structural disadvantage that has nothing to do with income-splitting and everything to do with how the exit was structured years before anyone contemplated the transaction.

The same issue arises in earnout structures, deferred consideration arrangements, and staged exits where proceeds flow over multiple years. The trust, which was the sensible holding vehicle at the time of structuring, becomes a trap under a policy designed to address a different problem entirely.

OUR POSITION

We will watch the final legislation carefully. We have views on the policy, we consider the current framing a blunt instrument applied to a precision problem, but our job is to advise within whatever framework applies. What we won’t do is recommend structural changes based on a draft that may yet be significantly amended.

If you would like to talk through how this might affect your specific position or transaction, please reach out directly.