Helpful Links

• Establish A Plan
• Maintain A Plan
• Estate Administration & Probate
• Estate Planning Process
• Trusts & Businesses
• New To North Carolina?
• Client Reviews

Trusts & Businesses

The Benefits of Business Interests Being Held in Trust

A person who owns their own business or who owns a business interest can greatly benefit from a trust based estate plan. Two of the most significant benefits of a trust based plan are probate avoidance and estate tax planning. Depending on an individual’s goals, different types of trusts may be used. Two common types of trusts are revocable trusts and irrevocable trusts.

Revocable Trust

Revocable trusts are trusts that may be amended or terminated at any time. The flexible nature of a revocable trusts provides the grantor with the freedom to make changes throughout the grantor’s lifetime. The flexibility of a revocable trust also allows the grantor to access or remove assets from the trust.

Irrevocable Trusts

In contrast, irrevocable trusts are trusts that become permanent the moment they are established. An irrevocable trust allows the grantor to effectively remove an asset from the grantor’s estate by transferring the asset to the trust.

Probate Avoidance

Business interests are subject to probate. The probate process can be long, expensive, and contentious. Probate documents are also public record. Effective estate planning can completely avoid probate, affording privacy as to the disposition of the estate and ease of administration. Ease of administration is often one of the most important benefits of using a trust based estate plan. Without it, the probate process can force a suspension of business due to a change in ownership.

Further, creating a revocable trust and assigning a business or a business interest to the trust can give the trust beneficiaries clarity and flexibility. For example, a grantor may dictate that a business be left to their children, but if a child chooses not to take an interest in the business, the child may instead take a pro rata share of other estate assets. This type of trust term provides protection from a taxable event, not to mention possible family conflict.

Using a revocable trust to assign assets, including business interests, is an excellent way to ensure that a business interest avoids probate.

Estate Tax Planning

Business interests are considered part of one’s taxable estate. Although North Carolina does not currently have an estate tax, the federal government does. As of 2020, the federal estate tax exemption is $11.58 million per individual and $23.16 million per married couple. If an estate greater than the federal exemptions, the estate is subject to an estate tax rating from 17% to 40%. Many people with estates valued under the federal exemptions may not be concerned about the federal estate tax. However, it is important to note the following:

• The current exemption is scheduled to sunset in 2025.
• It is impossible to predict what the estate tax exemption will be in the future.
• The pre-2018 exemption was $5 million per individual and $10 million per married couple.

Having a valuable business as part of one’s estate may cause the estate to be subject to the federal estate tax. An irrevocable trust is an estate planning tool that can help decrease one’s taxable estate. Once an asset, such as a business or business interest, is assigned to an irrevocable trust the trust becomes the new owner of the asset for tax purposes. As such the asset will be subject to trust tax rather than the grantor’s income tax.

It is important to reiterate that an irrevocable trust is permanent. Except under rare circumstance, the terms, trustees, beneficiaries, and assigned assets are non-modifiable once the trust is established. The permanent nature of an irrevocable trust can be a hinderance for some people. An ideal situation in which one may utilize an irrevocable trust for business assignment is when the grantor no longer requires access or control of the business.

Establishing an irrevocable trust to which assets are assigned, such as business interests, can be very complicated and require the advice and guidance of a CPA and tax planning attorney.  If you are interested in engaging with Brady Boyette, PLLC for estate planning services, we would be happy to work with you.

This information does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Contact an attorney to obtain advice with respect to your particular legal matter.