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The Power of Dynasty Trusts: Building a Multigenerational Legacy for Business Owners

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You’ve worked hard to build your business from the ground up, and now you’re reaping the rewards. But have you ever wondered what will happen to your finances after you’re gone? If you’d like to share your wealth with future generations, consider dynasty trusts.

Below, learn about the benefits of creating a dynasty trust, as well as how to set one up for your descendants.

What Is a Dynasty Trust?

Typical trusts distribute wealth to just one or two generations (children and grandchildren, for example). Dynasty trusts, on the other hand, can last for many generations. A dynasty trust remains open until the last bit of wealth is distributed to beneficiaries. That means an inheritance for your great-grandchildren and beyond can be protected from being squandered by setting up a dynasty trust.

Dynasty trusts are a type of irrevocable trust. That means once you put assets into the trust, you can’t take them back out. This sounds rather restrictive, but it allows for significant asset protection and tax savings.

Who Are Dynasty Trusts For?

Unlike regular trusts, which anyone can set up regardless of how much money they have, dynasty trusts are largely economical only for high net worth individuals. That’s because the point of a dynasty trust is to pass down wealth to multiple generations. If you don’t have much wealth, the costs of maintaining the trust for multiple generations may outweigh the benefits and the funds in the trust will be exhausted sooner rather than later.

Benefits of Dynasty Trusts

One of the biggest benefitsof setting up a dynasty trust is the tax minimization your beneficiaries will enjoy. You pay gift or estate taxes on assets only once when they enter the trust, which means your beneficiaries won’t owe estate taxes on those assets when they’re distributed. Because many assets appreciate significantly over time, this transfer tax savings is a very appealing benefit.  Care must be taken, however, to optimize the application of generation skipping tax exemption in order to minimize generation skipping transfer taxes.

Dynasty trusts also offer the creator of the trust a significant amount of control. You can choose your trustee and beneficiaries and dictate terms for how the trustee will distribute the funds.

How To Create Your Dynasty Trust

Your dynasty trust will last for generations, so it’s important to set it up properly. Here’s how to do it.

Consult With an Estate Planning Attorney

Dynasty trusts involve complex state and federal tax situations, so you’ll need to consult with an estate planning attorney who can explain the implications to you. Your attorney can also discuss asset protection strategies that will safeguard your wealth from creditors.

Name Your Beneficiaries and Choose Your Trustee

When it comes to choosing your beneficiaries, you can opt to leave wealth to children, grandchildren, great-grandchildren, other recipients, or a combination of these. The longer you want the trust to last, the more complex choosing beneficiaries becomes.

You will also have to choose a trustee to manage your trust. The trustee is responsible for safeguarding your assets and distributing them according to your terms, so choose wisely.

Decide Which Assets To Place in the Trust

You can place any assets you like into a dynasty trust, but some assets are better than others. Non-income-producing but appreciating assets, such as tax-exempt bonds and non-dividend-paying stocks, are ideal for dynasty trusts.

Real estate is another option. Many families use dynasty trusts to buy property with the intention of preserving these assets for future generations.

Determine the Distribution of Funds

Now comes one of the trickiest parts: deciding how you want the trustee to distribute funds. Will your beneficiaries need to meet certain requirements before they can inherit your wealth? For example, you might choose to distribute funds when a beneficiary marries or goes to college.

Such stipulations are called spendthrift clauses. They protect your wealth from being lost by irresponsible beneficiaries and taken by creditors. 

Fund the Trust

You can choose to add funds to your trust while you’re still alive or at your death. Both of these choices have tax implications that can affect both you and your beneficiaries, so talk with an estate planning lawyer before you decide.

You could also claim certain exemptions depending on when you fund your trust. For example, the Tax Cuts and Job Act (TCJA) doubled the lifetime federal estate tax exemption (which is indexed for inflation and is, in 2024, about $13.6 million, but the increased exemption will expire (“sunset”-drop by half) in 2025 absent Congressional action. If you’d like to take advantage, it might be worth funding your trust before the increased exemption amount sunsets.

Protect Your Multigenerational Wealth for Future Generations

Want to learn more about dynasty trusts and determine whether they are right for your estate planning goals? Contact Wilson Ratledge, PLLC at (919) 787-7711 for your consultation now.

Trusts for Accounts: A Guide for Business Owners

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Business owners with high-value retirement accounts should consider taking measures such as a retirement plan trust to protect that wealth after their deaths. While listing a spouse as a primary beneficiary for your 401(k) or other retirement accounts is typically recommended given the benefits of a spousal rollover, indicating children as contingent beneficiaries won’t always ensure that they receive the full amount after your death and can have other unintended consequences, for example, if a child predeceases you with surviving children. 

Setting up trusts to serve as contingent beneficiaries of retirement accounts helps ensure the safe passage of retirement accounts to beneficiaries and protects them from bankruptcy, divorce, and other risks. 

What Is a Retirement Trust?

You’ve likely listed your spouse as the primary beneficiary of your retirement accounts and your children as the contingent beneficiaries. With these beneficiary designations, your spouse would be the first to receive your remaining retirement assets after your death, which is typically recommended to retain the benefits of the spousal rollover. However, if your spouse was no longer living or disclaims them, your children would be next in line. 

Several issues could impact this wealth transition to your children after your death.

  • In the event of your child’s death, your assets could pass to his or her surviving spouse who may remarry and further pass your retirement assets outside of your family.
  • In a divorce, a child’s spouse could take some of the retirement assets. 
  • Your retirement assets could be subject to a child’s bankruptcy. 
  • A child’s medical event could drain your retirement assets
  • A business lawsuit or other litigious action could draw funds from your retirement accounts

You also have little control over how beneficiaries use those funds after your death. Should the retirement funds pass to minor children or grandchildren, the court may have to appoint a guardian to handle the money instead, with the assets passing outright to such children or grandchildren at age 18, far younger than you may wish. 

A retirement trust is an estate planning tool that can act as the new beneficiary of your retirement accounts if you are not married or if your spouse predeceases you. This gives you greater control over how and when beneficiaries receive assets from the trust and protects those assets from creditors and other risks. 

Using a Retirement Trust for Beneficiary Management 

Properly drafted retirement plan trusts qualify as see-through” trusts (which can be accumulation or conduit trusts). These trusts come with a few requirements:

  • They must be irrevocable upon your death.
  • All beneficiaries must be easily identifiable, eligible and named.
  • They must be legal under state law.

Setting up a retirement plan trust with the help of an asset protection attorney ensures that you structure your trust correctly. 

You can choose to name your children as the trustees of the retirement trust if they are old enough and will responsibly manage this money. Otherwise, you can designate someone else to manage the trust. 

Once you have finished setting up the trust, you must simply update your beneficiary designations for your retirement accounts. You may be able to do so through your provider’s online portal or by calling your account manager. 

Typically, you will retain your spouse as the primary beneficiary, and list the trust as the contingent beneficiary, passing the retirement accounts to the trust if your spouse predeceases you. If you are married, we recommend you and your spouse consider setting up a retirement plan trust.

Pros and Cons of Retirement Trusts 

Using trusts for managing wealth in retirement and after death poses many benefits. With a retirement trust, you can: 

  • Pass assets directly to the trust tax-free upon your death (though the trust, whether a see-through conduit or accumulation trust is still subject to required minimum distributions rules and such distributions are taxable) 
  • Protect inherited retirement accounts from lawsuits, creditors, and divorce proceedings
  • Control who will manage account funds after your death
  • Prevent a spendthrift beneficiary from squandering their inheritance money

Create Your Trust With the Help of a Qualified Legal Team

Talking to an estate planning attorney can help you determine whether a retirement trust makes sense for your goals. 

At Wilson Ratledge, PLLC, we can help you create a trust that protects your wealth and stands up to legal scrutiny. We can also assist with tax planning, business law, and more. Request a consultation today to learn how we can serve you.

The Family Business Continuity Plan: Trusts and Succession Planning

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Whether you start a company from scratch or inherit a family-run business, it’s never too early to start planning for what happens if something unexpected happens to you, or for when you may want to retire or do something different. Business succession planning is a critical component of any estate plan. Trusts are often a key component of any family business continuity plan.

Continue reading, where we’ll share important details you need to know about these options and how they protect your North Carolina family business’s best interests now and for the future.

What Role Does a Succession Plan Play Within Business Continuity Generally?

Business continuity plans generally focus on the implementation of preventative measures that will ward off threats, including cyber attacks or natural disasters, that could compromise your business, and the identification of recovery strategies to deploy if harm occurs. Similarly, business succession planning is also a protective measure for your company. 

Why Having a Plan in Place for Your Company’s Transfer of Leadership or Ownership Is Necessary

Succession planning serves the role of giving your company the best chances of continuing and thriving if something were to happen to its current leadership – you. The advance planning results in a roadmap to be implemented if you suffer a disabling injury, untimely death, or simply retire.

In addition to protecting your legacy for your family, having a plan in place matters for many more reasons  For example:

  • Employees: Your employees may worry about their jobs evaporating if something happens to you. Knowing that you have a plan in place may help with morale and productivity.
  • Customers, vendors, investors, and partners: Having a plan in place can give them confidence in your operation, as it shows that you intend to keep your business going for the long term, and thus, they may be apt to do more business with you, offer more competitive rates, or consider supporting you in other ventures.

What Making a Succession Plan Entails

Business continuity planning like this may take different forms.  You might begin by identifying a successor to lead your company in your absence. Compile a list of candidates and investigate their interest in being part of your succession plan. Should you be unable to identify any suitable candidates in-house, you’ll want to consider looking outside your operation.

Once you identify the right candidate to keep your business going, you must invest time in preparing them to eventually lead your business, and you must document your plans for this transfer.  Even if your plan is for your business to be sold or for someone to “wind down” the business when you are no longer able to run it for any reason, it is important to plan for and document that as well.  While there are a multitude of documents that may be involved in succession planning, we focus below on the benefits of trusts.

How Trusts Figure Into Business Succession

Trusts can bring many beneficial elements to your succession plan.  Below are just some examples. 

  • Ensure Seamless Leadership: Life can be unpredictable. A trust allows you to pre-appoint a successor trustee who can take the reins immediately, minimizing disruption and keeping your business running smoothly. The trust document can also be drafted to address unforeseen situations, providing stability during uncertain times.
  • Maintain Family Harmony: Family businesses can be a breeding ground for conflict, especially when it comes to inheritance. Trusts can specify how to distribute ownership or profits, mitigating disputes and fostering continued family involvement in the business, if that’s your desire.
  • Minimize Taxes: Strategic use of trusts can help reduce your estate tax burden. For instance, irrevocable trusts remove assets from your taxable estate, potentially saving your heirs a significant amount of money. Consult with a tax advisor to explore the specific tax implications for your situation.
  • Protect Your Legacy: Beyond financial benefits, trusts can be used to ensure your business continues to operate according to your values. A “purpose trust,” for example, prioritizes the mission and vision of the company over short-term gains. [link prior post about “Patagonia”]
  • Provide Flexibility and Control: Trusts offer a high degree of customization. You can specify who benefits from the trust, when they receive distributions, and even include conditions for continued involvement in the business.

Choosing the Right Trust

There are various types of trusts, each with its own advantages and drawbacks. A revocable living trust allows you to retain control of the assets while you’re alive, but upon your passing, the trust avoids probate, saving time and money. An irrevocable trust, on the other hand, relinquishes control but offers greater tax benefits.

How the Attorneys at Wilson Ratledge Can Help You Plan for Your Family and Company’s Future

If there’s one detail you should know about a family business continuity plan, it’s important not to put it off. The unexpected can suddenly happen to anyone. Delaying having the appropriate legal documents drafted, funding trusts, or otherwise engaging in succession planning can complicate transfers of business, leading to the unintended demise of the business that you wanted to continue to exist and provide for your family once you were gone. 
Crafting an appropriate estate and succession plan for your business is complicated, and you should seek competent business and trusts and estate planning legal counsel. Contact our law firm, Wilson Ratledge, now to discuss your goals for keeping your business in operation after you leave it, for any reason.

Independent Contractor vs. Employee: Legal Distinctions and Implications

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Various work arrangements exist, and sometimes there are even subcategories within each. For example, companies in Raleigh may exclusively hire employees, including part-time and full-time or salaried ones. Other North Carolina businesses may only take on independent contractors (ICs) or have a hybrid arrangement consisting of employees and ICs. As a company owner or member of upper-level management, you must realize that there are notable distinctions between the independent contractor vs. employee classifications. Continue reading below, where we’ll discuss the legal distinctions and implications associated with each.

Understanding the Legal Distinctions Between Employees and Independent Contractors

Simply put, an “employee” (sometimes referred to as a “W-2 worker”)  is someone who works directly for and under the direction of a company or a business owner.  The Code of Federal Regulations (CFR) and more specifically, 26 CFR § 31.3121(d)-1(c), spells out how the Internal Revenue Service (IRS) views a relationship as an employment relationship when the employer “has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” 

In contrast, an “independent contractor” (sometimes referred to as a “1099 worker” or, incorrectly and problematically, as a “1099 employee”)  is described as being free to perform his or her tasks or functions at the individual’s own discretion with regard to means and methods. Given their arrangement with the employer, ICs must report and pay their own income and self-employment taxes as compared to employees, for whom employers are required to withhold deductions from paychecks for taxes income taxes and government programs like Medicaid, Social Security, and unemployment insurance.

Workers Are Commonly Misclassified as Independent Contractors vs. Employees

Employers often misclassify their workers as “independent contractors” instead of as “employees”  without the workers’ knowledge, by having the workers fill out the wrong tax paperwork and then not making any withholdings from their paychecks. Although unlawful, employers may do this for a number of reasons, including to avoid common employer obligations, including:

  • Having to make payroll deductions: Employers must withhold taxes used to pay for government programs like Social Security, Medicaid, and unemployment, whereas that’s required of them if they have independent contractors. 
  • Offering health insurance: Per the Internal Revenue Service, under the Affordable Care Act (ACA), employers with at least 50 full-time workers must provide health insurance to at least 95% of their staff. The smaller a company is, the more likely it is that it will solely hire independent contractors or have a hybrid arrangement to avoid providing insurance.
  • Complying with minimum wage and overtime pay obligations: The N.C. Department of Labor outlines how a Fair Labor Standard Act- and Wage and Hour Act-compliant role is one where workers must be paid no less than the federal minimum wage, which corresponds with the North Carolina minimum wage, and is currently at $7.25 per hour for up to 40 hours of work and pay and a half for overtime (so hours over 40 in one week); although there are exceptions to this rule for certain exempt employees. There’s little to no oversight for pay for independent contractors.
  • Having to offer additional employment benefits: Employers with just independent contractors don’t have to worry about offering paid annual or sick leave or workers’ compensation, the latter of which is insurance that the North Carolina Industrial Commission says all employers with three or more employees must have.
  • Making contributions to retirement plans: Employers get out of paying toward a worker’s 401(k) and other types of retirement accounts if they’re not bona fide employees.

Implications Associated With Errors in Classifying Workers

Hiring employees instead of independent contractors involves extra work and added costs as an employer. However, you shouldn’t let that push you into misclassifying your workers thinking that will relieve you of obligations to purchase workers’ comp coverage, pay overtime, or comply with other governmental requirements, as there may be fines levied and back taxes due for doing so. Specifically, since 2017, the  North Carolina Industrial Commission has maintained a fully-staffed “Employee Classification Section” whose main purpose is to investigate  and then pursue those employers  who have misclassified their workers as  “independent contractors” instead of as “employees.”  Moreover, in the case of a worker getting hurt on the job, your company may be sued for damages without the protection of an insurer to cover the costs if you have misclassified that worker as an independent contractor.  

In addition, the IRS tests a multitude of factors to determine whether a worker should be classified as an employee or IC.  The U.S. Department of Labor also has its own criteria, which it has recently updated, and we recently wrote about that here.

As a law firm that assists business startups with incorporation and aids existing Raleigh companies with operational matters, Wilson Ratledge supports its clients with a wide range of matters, including workers’ comp defense. We are ready to support you with your company’s needs to ensure you don’t land on the wrong side of the law and incur unnecessary costs. Contact our law firm to schedule a consultation with a business law attorney to discuss your company’s legal needs.

Crafting a Strategic Advisory Panel To Aid With Business Growth and Wealth Management

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Wherever you are on your journey to building wealth and a legacy, including starting or growing your business or thinking about how your business fits with your financial and estate planning, having a carefully selected team of professional advisors to answer your questions and provide you with trusted advice is critical in making wise, strategic decisions. The professionals on your advisory panel, in addition to your attorney, should include a CPA, a financial planner/wealth management advisor, and possibly a real estate professional, and they should all work together as a team.

What Role Will Each Member of Your Wealth Preservation and Growth Panel Serve

While you may have a clear understanding of what each of the professionals described above, we want to discuss how they can support you as a collective. We’ll go one-by-one and highlight how each of the uniquely trained advisors on your team can pool their expertise in helping you make informed business and wealth management decisions. 

Your CPA as Accounting and Tax Advisor

You can rely on your accountant to provide you with operational assistance such as bookkeeping and payroll compliance, as well as assistance with budgeting and financial forecasting and tax planning, reporting, and compliance. Your work with a good CPA can reduce the chances of you encountering more costly problems in the future.

Your Wealth Manager as an Investment and Financial Planner

The role of your wealth manager is not only to safeguard the wealth you already have but to help you grow your proverbial nest egg. A skilled financial advisor will know you and your objectives, and your risk tolerance, and with this insight and their experience and knowledge to help you develop investment strategies to help you achieve your desired financial outcomes.

Your Real Estate Advisor as Property Professional

For many, investing in real estate is a component of a long-term growth strategy, or you may need to find space for your business to rent. Having an  experienced real estate professional to help you navigate investment opportunities or find a home for your business can be essential in your overall plan

Your Attorney as Legal Advisor and Quarterback

From starting your business to drafting and negotiating contracts, and possibly one day selling your business or passing it on to your heirs through a comprehensive estate plan, these are just some examples of how a lawyer can counsel you and aid you in devising risk mitigation strategies, to advance your financial objectives.

Building a Strong, Strategic-Oriented Advisory Panel To Support You

When forming your panel of advisors, it’s important that each professional is a communicative and proactive member of your team. Building your collective of professionals who understand the synergy and value of teamwork to help you develop and regularly update and adapt a strategy to build the legacy you envision can take time. However, one or more of our attorneys who regularly handle business and estate planning, and asset preservation is a good starting place. 

Contact our law office, Wilson Ratledge, PLLC, to discuss how our legal team can assist you in strategically planning for your future, including preserving and growing your business and your legacy.