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Navigating the Challenges That Are Often Associated With Estate Taxes

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The estate tax in North Carolina is a levy on the assets of a deceased person. In most cases, the tax applies to the balance of an individual’s estate after outstanding debts and final expenses are paid. The estate tax can be a major financial burden for heirs, who may need to sell assets or take out loans to pay the tax bill. In many cases, family members must delay distributions from an estate in order to cover the cost of the tax. 

In many cases, the tax is unavoidable and can lead to difficult decisions about how to dispose of a loved one’s estate. Here are some tips on navigating the challenges that are often associated with estate taxes in North Carolina.

How Much Are Estate Taxes?

In North Carolina, the estate tax was eliminated in 2013. So, you do not owe any estate taxes to the state. You do, however, need to pay some taxes to the federal government if the estate is valued at over $12.06 million. While this value is often adjusted for inflation every year, the federal estate tax exemption is $12.06 million in 2022. The tax rate is about 40%. 

However, there are some exemptions from the federal estate tax, for example, if the estate was given as a gift during the estate owner’s lifetime or if the estate was placed under the care of a trust. These are aspects of estate planning that might need to be discussed with an estate planning attorney. The attorney can help you to develop a strategy that best suits your needs.

Reducing Liability for Estate Taxes

As we just mentioned above, individuals looking to reduce their liability for estate taxes may want to consider creating a trust. A trust can be used to hold property. This will not only reduce the taxable estate, but the trust will also help to manage the property and any income it generates in a tax-efficient manner. Trusts can also help protect assets from legal judgments and creditors. In addition, trusts can be used to provide for beneficiaries in the event of the settlor’s death.

Gifting property is also another way that can help reduce the amount of federal estate tax owed on a person’s estate after they die. The IRS allows individuals to give away some amount without having to pay any gift taxes. This amount is known as the “exclusion amount.” Gifts that exceed the exclusion amount are subject to a gift tax at a rate of up to 40%.

However, there are ways to give away more than the exclusion amount without having to pay the gift tax. One way is through a technique known as “gift splitting.” This allows spouses to split their combined gift exclusion amount between them. This means that each spouse can give away up to a bigger gift without having to pay any gift taxes.

Reviewing Beneficiary Designations

A beneficiary designation is a legal document that states who will receive your property after you die. It is important to review your beneficiary designations regularly to ensure that they reflect your current wishes. For example, if you have named someone as a beneficiary who is no longer alive, or if the property you want to leave to them has been sold, you will need to update your designation. Otherwise, your wishes may not be carried out after your death.

Planning Ahead To Minimize Estate Tax Liability

Estate taxes can be a significant burden on heirs, particularly if the estate is large. However, as you have seen, there are a number of action steps that can be taken to minimize or avoid estate tax liability. However, just knowing what to do is not enough, you need to take action.

One of the most important things you can do is to plan ahead. Start by reviewing your assets and liabilities and estimating the value of your estate. If you have a spouse or children, consider how they will be affected financially if something happens to you. 

Next, you take steps to make provisions for transferring ownership of assets to your loved ones during your lifetime or consider setting up a trust as a way to reduce your taxable estate. 

Minimizing estate tax liability is a complex subject, and it’s important to have an experienced team to help. Wilson Ratledge has helped numerous families create a plan that will minimize your estate tax liability and ensure that your loved ones are taken care of after you’re gone. Contact us today to schedule a consultation!

Common Structures For Business Exits In North Carolina

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When a business owner in North Carolina is ready to retire, sell, or wind down their business, they will need to choose the appropriate structure for the exit. There are a few common structures used for business exits in North Carolina. We will discuss them in this article. 

Each option has its own set of benefits and drawbacks, so it’s important to understand them all before making a decision. In any case, if you’re considering an exit strategy, it’s important to work with an experienced Raleigh business lawyer to set up the option you believe is best for you and your company and get you started.

Types of Business Exits in North Carolina

There are a number of different structures for business exits in North Carolina. They are listed and briefly discussed below.

1. Sale of the Company

The sale of a company as a business exit strategy is the process by which a company sells all or part of its operations and assets to another company. This means that they will find a buyer who is interested in purchasing the company’s assets and operations as a whole or in part. This can be a good option for the owners, as it can allow them to receive some money for their business and avoid having to close it down completely.

In most cases, the company will hire an attorney and a banker to help them find a buyer and negotiate the sale.

2. Management Buyout

A management buyout (MBO) is a type of business exit strategy in which the current managers of a company purchase the company from its previous owner(s). This can be done with or without the help of outside investors. 

MBOs are often used when the previous owner(s) wants to retire, when there needs to be a change in ownership, or when the company is facing financial difficulty.

3. Employee Stock Ownership Plans (ESOPs); Earnouts Based on Performance

ESOPs are employee-owned businesses in which employees are given company stock in order to give them a financial stake in the company. This can help to incentivize employees and make them feel more invested in the company’s success. An earnout is a payment made to an employee based on their individual performance. 

It can also be used as a business exit strategy, allowing the owner to compensate the most hardworking staff for handling company affairs when they are gone.

4. Going Public

When a company decides to go public, it is selling ownership stakes in the form of shares of stock to the investing public. This process allows a company to raise money by giving potential investors the chance to buy a piece of the company. The company will also be listed on a stock exchange, which will provide liquidity (the ability to sell shares when needed) and transparency (the ability to track the stock price and performance). 

In some cases, the company’s head will decide not to hold on to any shares of the company, and may thus make their exit in this way. In other cases, they may hold on to very few shares, which gives them very little control over any of the company’s activities.

5. Private Equity Buyouts

A private equity buyout is the acquisition of a company by a private equity firm. Private equity firms are firms that invest in companies that are not publicly traded on a stock exchange.

Private equity buyouts as a business exit strategy can involve a number of different steps in order to be successful. The first step is finding a private equity firm that is interested in buying the company. Once a private equity firm is found, the company will need to provide detailed financial information so that the private equity firm can perform due diligence on the company. If the private equity firm is interested in the company, they will make an offer to buy it.

7. Mergers & Acquisitions

A business founder can acquire an opportunity to exit from the business through mergers and acquisitions. The business can be acquired by another company that is interested in expanding its market share or that is looking for new products or services to offer its customers. 

The acquisition can also provide the previous business owner with the opportunity to receive financial compensation for its ownership stake in the company. This compensation can come in the form of cash, stock, or other assets.

8. Dissolution

The dissolution of a business can be used as an exit strategy for the owners or shareholders of the company. This process involves the legal termination of the business and the sale or distribution of its assets. 

The goal of this strategy is to provide a way for the owners to liquidate their interests in the company and receive cash or other assets in return. Dissolution is often used to terminate a business that is no longer viable or has run into financial troubles but may also be used simply as a business exit strategy.

Our Raleigh Business Law Firm Can Help

If you’re ready to take the next step in your life and are considering exiting your business, there’s a lot to consider. The experienced team at Wilson Ratledge has helped many business owners just like you find the best option to maximize the time and financial investments you’ve put in your company over the years. Contact us today to schedule a consultation and explore your options.

Kristine L. Prati to Speak at the NCADA’s 45th Annual Meeting

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The North Carolina Association of Defense Attorneys 45th Annual Meeting and 12th Biennial Judicial Candidates’ Forum will be held in Wilmington, June 16, 2022 through June 19, 2022.  Attorney Kristine L. Prati, 2021-2022 Vice-Chair of the Workers’ Compensation practice group of the NCADA, will speak before other professionals on “Futility” Cases In Workers’ Compensation.  Her session will provide a history of “futility” cases, the issues related to such cases, and lessons learned.

WC: Extended Benefits in North Carolina

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The North Carolina Industrial Commission recently issued decisions in the first round of extended benefits cases, in which claimants are arguing entitlement to temporary total disability benefits past the 500-week cap. On May 19, 2022, Attorneys Paul F. Toland and Kristine L. Prati attended the joint seminar offered by the NCADA and NCASI to learn more about the history of the legislation, analyze the cases decided to date, and explore strategies moving forward.  If you have questions about how this may impact your claim, or wish to discuss extended TTD benefits in North Carolina, contact them today to learn more!

When Does It Make Sense to Move From A Single Member LLC To Filing As A S Corporation?

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An LLC is a limited liability company that allows a business to operate with a flexible structure and with fewer requirements than a corporation. Additionally, it provides protection to the individual operating the business and potentially offers tax savings. However, as an organization grows and changes so does its legal structure. 

Knowing when it makes sense to move from a single-member LLC to filing as an S corporation can aid you when the time comes to make this important change to the way your business is structured.

Company Growth

The size of the organization is a key factor in determining when it is time to move from an LLC to an S Corporation. An LLC is perfect for an individual who wants to flexibly manage their business without a board of directors. As the company grows then moving to an S Corporation should be considered.

An S Corporation allows room for a maximum of 100 shareholders. When your organization shifts from being operated by a single member or a small group of members to a large number of shareholders then it may be time to consider filing as an S Corporation.

Tax Benefits

When operating as a single-member LLC or a sole proprietorship, all profits from the business flow through as Schedule C income, and are taxed fully as self-employment income at a high rate. If the profitability of the business is high enough, moving to an S corporation can allow the owner(s) to take a salary, and then pay out additional profits as a distribution to save taxes. Profitability of the business as an S corporation will flow through to the owner(s) on a Schedule K-1.

Tax Preferred Retirement Savings

Establishing an S Corporation gives the taxpayer additional options and opportunities when it comes to saving for retirement. Once a taxpayer has an S Corporation they are able to set up a Solo 401(k). A Solo 401(k) is a 401(k) that is designed for a business with no employees. There are no age or income limitations or restrictions with the only requirement for establishing a Solo 401(k) being that you are a business owner with no employees. After the Solo 401(k) is set up an individual can contribute up to $61,000 with an additional $6,500 catch-up contribution if an individual is 50 years of age or older.

Desire For Shareholders

As a business grows and decides to expand it may decide to offer stock options. Once they begin selling stock the individuals who purchase equity in the company in this manner become known as the shareholders. An LLC does not have shareholders only members who share the profits of the business. An S Corporation can have shareholders who own stock in the business. An S corporation is permitted to have 100 shareholders at any given time.

Need to Complete Ownership Transfers

After it is established there are no restrictions on ownership transfers within an S corporation. Stakeholders are able to sell their shares of the company at any time. They have the option of using their shares to raise capital or to potentially attract new investors. There is no ability to offer stock as an LLC meaning there is no easy method of transferring shares of the company. An S Corporation allows for smooth transfers of ownership shares to multiple individuals over an extended period of time.

Ready to Establish a Board of Directors

The shareholders of an S corporation are not responsible for overseeing all of the activities of that corporation. The body responsible for that task is referred to as the board of directors. This board is elected by the shareholders so if an organization believes it is ready to establish its own board of directors it will need the shareholders of an S corporation to do so. These board members appoint officers and executives for the corporation, determine the mission of the corporation and decide the policies regarding the overall management of the corporation.

Our Raleigh Business Startup Attorneys Can Help

The shift from operating a single-member LLC to managing an S corporation can be a major one. Preparing to establish a board of directors, accommodating shareholders, and completing ownership transfers are all large steps that are vastly different from running a business as an LLC.

Knowing when you are ready to begin filing as an S corporation can make the change in filing easier for you to manage. The team at Wilson Ratledge has the experience and expertise to help your business grow the right way – contact us today to schedule a consultation!

What Is A 1031 Exchange And How Can It Help With Taxes?

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In the world of real estate, the term 1031 exchange is a type of purchase that is allowed under Section 1031 of the United States Internal Revenue Code. The purchase allows either a business or the owner of an investment property to defer the federal taxes on certain real estate exchanges. 

The term comes from the Internal Revenue Code Section 1031 which allows the exchange of real property that is not being held primarily for sale for other business or investment property.

Section 1031 Explained

A 1031 exchange, also known as a like-kind exchange, is one that occurs when one investment property is swapped for another. These transactions are taxable sales but if you meet the requirements of a 1031 exchange you will have limited tax or no tax at the time of the exchange. Essentially you are changing the form of an investment without cashing out or recognizing a capital gain as the Internal Revenue Service would see.

Benefits of a 1031 Tax Exchange

A 1031 tax exchange has many benefits for the average property owner. The primary benefit of a 1031 exchange is that you can sell one property, buy another property and avoid capital gains tax through the transaction. Doing this can save you a substantial amount of money while allowing you to purchase a new property and sell another property. It also helps you to avoid paying what could have been a hefty tax amount.

Time Limits

There are time limits associated with a 1031 exchange that must be strictly adhered to. When completing an exchange a new property must be purchased within 180 days. Failing to stay within this timeframe could have dire consequences. When completing any 1031 exchange you must be sure to complete your new property purchase within the time limit.

Rules for 1031 Tax Exchanges

In addition to the time limits, there are rules associated with 1031 tax exchanges that you should be aware of. 

The first and foremost rule is that the replacement property should be of equal or greater value than the original property. You should not get a lower-cost property when doing a 1031 tax exchange. 

Second, you can purchase up to three properties without regard to their fair market value as long as their aggregate value does not exceed 200 percent of your original property’s sale price. 

Third, you have to identify your replacement properties within 45 days of selling the original property. Finally, the replacement property (or properties) purchase must be completed within 180 days of the initial property sale.

How Can a 1031 Exchange Help With Taxes

A 1031 exchange can help you with taxes by allowing you to avoid short-term capital gains taxes. Capital gains are the profits made from selling an asset such as a car, land, house, or boat. Typically, an individual is taxed on these profits but by completing a 1031 tax exchange you can avoid this tax entirely.

Other Benefits of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange – one being that it resets the clock on depreciation. Depreciation is the percentage of the total cost of an investment property that is then written off each year. It also allows you to consolidate multiple properties into one property for the purpose of estate planning. 

Alternatively, it gives you the option of dividing one single property into multiple assets. Perhaps most importantly a 1031 tax exchange allows you to defer the capital gains tax. This frees more capital for investing in the replacement property.

Getting The Most Out Of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange and it is important that you take advantage of as many as possible. Getting the most leverage out of the exchange can help you in the long run with taxes, other purchases, and more. 

In order to learn more about this type of tax exchange and find out how they can help you talk to a qualified and experienced tax attorney. The tax attorneys at Wilson Ratledge can review your unique financial situation and determine how a 1031 tax exchange can be used to help you. We can help you in planning your course of action, fill out the documentation for you, communicate on your behalf, and much more. 

If you have more questions or are ready to move forward with a 1031 tax exchange, reach out to our office today to schedule a consultation!