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What Is A Dynasty Trust?

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Overview

A Dynasty Trust is a trust that lasts for a long period of time, often multiple generations.  Briefly, a dynasty trust is a technique designed to allow its creator to pass wealth from generation to generation without the burden of transfer taxes, including estate and gift tax and the generation skipping transfer tax (GSTT). The technique passes wealth to successive generations of descendants with distributions and operation of the trust being controlled by the terms initially established by the grantor of the trust. The trust is irrevocable and, once funded, the grantor no longer has control of the assets and will not be able to reach the assets or amend the trust terms. Clients can achieve great economic benefits through the use of Dynasty Trusts. These benefits can include the accumulation of money inside the trust without the direct transfer of assets to any beneficiaries, excluding the assets from the clients’ taxable estate and potentially excluding the assets from the beneficiaries’ taxable estates.

Dynasty Trusts can also provide strong asset protection for future generations. Grantors have great flexibility with Dynasty Trusts in structuring long-term non-financial incentives to help beneficiaries learn more about handling and investing money before they have control of inherited assets, motivate beneficiaries to become involved with philanthropy, to encourage the beneficiaries to go to college or make a down payment on a home for a beneficiary.

 

How does a Dynasty Trust work?

To establish a Dynasty Trust, the client creates an irrevocable trust for the benefit of one or more beneficiaries such as children or grandchildren. The client can name the trustee(s). The trustee would be empowered to distribute income and/or principal for the beneficiaries’ reasonable support, medical care and/or best interests.  This is a very broad standard. The beneficiaries can be given the power during their lifetimes and/or by will to appoint some or all of the trust’s assets to any one or more the client’s descendants. At the beneficiaries’ death, the remaining assets, if any, would be distributed to further, similar dynasty trusts, for his or her descendants.

 

Gift and Estate Tax Considerations

The gift tax system applies to transfers to Dynasty Trusts. Therefore, when considering the lifetime funding of a Dynasty Trust, consider limiting lifetime transfers to the amounts covered under the lifetime credit against gift tax and the annual exclusion amount ($14,000 per participant, per year in 2015). Any gift taxes paid on the transfer of assets to a Dynasty Trust are deducted from the client’s estate, reducing the estate (and thus the taxes paid) at the client’s death. Also consider the generation-skipping transfer tax (“GSTT ”) when creating a Dynasty Trust. The GSTT is a tax on lifetime and testamentary transfers to persons more than one generation below the transferor, at the highest marginal estate tax rate. If a client applies his or her lifetime GSTT exemption to transfer assets to a Dynasty Trust, the income and principal that accumulate inside the trust may be distributed free of the GSTT for the duration of the trust.

 

State Considerations

An important issue when setting up a Dynasty Trust is the applicable state’s rule against perpetuities (“RAP”), which generally provides that an interest in trust is invalid if it can last longer than the lives of persons named in the trust plus 21 years. Although this rule has been abolished or significantly modified in many states (limiting the duration of trust to several generations), clients wishing to create a dynasty trust that could last perpetually should consider creating it in a jurisdiction that has no RAP.

 

To learn more about Dynasty Trusts or to speak with one of our experienced attorneys about estate planning, call us today at 919-787-7711 or contact us online.

What To Do When The IRS Comes Calling On Your Business

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Few things strike more fear in a business owners heart than having an IRS agent knocking on the door of their business. If you have ever wondered what to do in this situation, follow these tips:

  1. Ask to see the individual’s credentials.  You will learn a great deal about the nature of the visit based on who is standing before you.  A Revenue Officer will most likely be there to collect unpaid income or payroll taxes.  A Revenue Agent will be there to audit you or your business.  A Special Agent will be there to investigate you or your business for criminal activity.  Special Agents are required to identify themselves and notify you if you are under criminal investigation.
  2. Tell the agent as little as possible, but do not lie.  The agent will likely want to engage you in discussion as soon as possible.  Despite what the agent suggests, he or she is almost never going to go away just because you give them a little information.
  3. Tell the agent you wish to consult a lawyer…and do it!!! As soon as you tell an agent that you wish to first consult with a representative, he or she should suspend the interview.  This will enable you and your representative to determine the correct strategy for dealing with the IRS.  Also, your tax preparer or an experienced tax lawyer will be better able to explain your position to the IRS.
  4. Do not let the agent into nonpublic areas.  An IRS agent has the right to come into public spaces such as your business’s waiting room or a public dining room. The agent may not come into private areas such as your home, business office, warehouse, kitchen, or factory without your permission, a warrant, or a court order.  Don’t invite them in.
  5. Do not give the agent business records or other documents.  The agent may ask to see your business records or other documents, even if you’ve told him or her that you wish to terminate the interview.  Repeat your desire to get professional representation, and decline to give them any paperwork.

If an IRS agent has called on your business or you want to prepare for such an event, contact the attorneys at Wilson Ratledge.

Are You Prepared For Mental Incapacity?

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A power of attorney enables you to select who it is that you would want to handle your affairs in the event of your incapacity, as opposed to having the court decide this for you.  There are two types of power of attorney in North Carolina, a Durable Power of Attorney and a Health-Care Power of Attorney.

Durable Power of Attorney

The primary purpose of a Durable Power of Attorney is to give another person the legal authority to handle your assets on your behalf during your lifetime.  Absent a Durable Power of Attorney, if you become legally incompetent to handle your property, the court would have to appoint someone to act on your behalf in that regard. That person is called a Guardian of the Estate.

Health Care Power of Attorney

The primary purpose of a Health Care Power of Attorney is to give another person the legal authority to make health care decisions for you if you cannot make or communicate your own health care decisions.  Absent a Health Care Power of Attorney, if you are not able to make or communicate your own health care decisions, the court would have to appoint someone to do this for you. That person is called a Guardian of the Person.

If the same individual serves as both Guardian of the Estate and Guardian of the Person, that person is called a General Guardian.

Naming an Attorney-in-Fact and a Health Care Agent before incapacity is a good idea. It can avoid the unpleasantness and expense associated with having to be declared in incompetent by a court, to have a Guardian of the Person and/or Estate appointed and for the Guardian of the Estate to have to file accountings with the Clerk of Court. It can also avoid unpleasant disputes among family members and maybe even others as to who should be appointed by the Court to act on your behalf.

Your Will May Not Be Legally Binding

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In the months after a death, procedures and deadlines are far from the minds of the family. However, a death in the family often leads to legal disputes over the deceased’s property. Hard economic times and the increased availability of internet legal forms have led more people to attempt to draft wills, trusts and powers of attorney without the assistance of a lawyer. As a result, will disputes or contests are on the rise.

Even if the deceased has left a will, disputes can arise as to the will’s validity. To be legally binding, a will must be, among other things, signed by the deceased (the testator) and two uninterested witnesses. In order for the will to be “self-proving” the testator and the witnesses must sign in front of a notary and the will must contain specific language regarding the signing by the testator and the witnesses. Also, the testator must have sufficient mental capacity. A testator must understand that a will is being made and how the will affects his or her property at death, what property the testator owns, and who the beneficiaries are (“the objects of his bounty”). If any of these elements is missing, a court can find the will invalid.

In addition, a will can be deemed invalid if it seems likely that the testator wished to do one thing, but a third person coerced or unduly influenced him or her to do something else. The coercion does not have to be physical, and usually is not. Rather, the typical case of undue influence involves a testator who is otherwise competent, but feeble, and a person in a position of trust—a relative, friend, or spiritual advisor—who takes advantage of the person’s frailty, convincing the testator to change his or her will.

Finally, even if a will is valid, the executor under the will has a duty to the testator’s creditor and beneficiaries under the will to administer the estate appropriately and in accordance with the law. If an executor abuses such power, or favors certain interests over others, then such executor may be personally liable for any harm done.

Whether you are the beneficiary under a will that is being challenged, or your loved one has left a questionable will, it is important that you seek the advice of a qualified Raleigh estate planning attorney. Most will challenges must be filed within three years after the will is probated, and even shorter deadlines must be observed in some cases. Similarly, if an agent under a power of attorney, an executor, or a trustee has acted improperly, the law imposes short deadlines for seeking relief.

IRS Warns of Unprecedented Phone Scam

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The Internal Revenue Service (IRS) is warning taxpayers of a sophisticated nationwide phone scheme that has become “the largest scam of its kind that we have ever seen.” The scheme reportedly involves individuals telephoning taxpayers claiming they represent the IRS and demanding immediate payments with a pre-paid debit card or wire transfer.

Reportedly thousands of victims — taxpayers — have already paid more than $1 million to the fraudulent individuals posing as IRS agents, according to Treasury Inspector General for Tax Administration (TIGTA) Russell George. He stated that his agency has received more than 20,000 reports of contact. Government officials also said that the perpetrators often know the last four digits of the victims’ Social Security numbers and threaten arrest, deportation and removal of driver’s licenses — something the IRS is not authorized to do.

If you feel you have been a victim of this scam, contact Wilson Ratledge and let one of our attorneys assist you.

Excise Taxes

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An excise tax is a tax on the manufacture, sale or use of goods, or on the carrying on of an occupation or activity. The federal government imposes excise taxes on a variety of activities, including the manufacture or sale of certain products; the operation of certain kinds of businesses; and the use of various kinds of equipment, facilities and products.
Although there are excise taxes on a variety of activities, the excise taxes that affect most consumers and small business owners are on:

  • Fuel (gasoline, diesel, kerosene and compressed natural gas)
  • Communications
  • Air transportation
  • Gas-guzzler automobiles
  • Sport fishing equipment
  • Vaccines

Fuel Taxes
Fuel tax is a common excise tax. Entities involved in blending, refining, transporting, using or selling fuel may be required to register with the government and pay excise taxes. The excise tax imposed on the sale, refining and blending of fuel is complex, with specific requirements for each entity involved in the process. Special rules also apply to different types of fuel. Generally, the tax is imposed at the time the fuel is removed from a storage terminal, upon entry into the United States or upon the sale of the fuel.

Communications Taxes
There is a 3 percent communications tax on amounts paid for local telephone service or teletypewriter exchange service. There are certain exemptions from this communications tax for particular services, such as bundled services and prepaid telephone cards, and for certain users, including nonprofit hospitals and educational institutions.

Air Transportation Taxes
Air transportation taxes apply to amounts paid for the air transportation of people and property and the use of international travel facilities. The tax on air transportation of people has two components: a percentage tax of 7.5 percent on amounts paid for air transportation and a domestic segment tax, which is a flat fee for each segment (a single takeoff and a single landing) of transportation. For 2009, the domestic segment tax is $3.60. There is also an international arrival/departure head tax. In addition, amounts paid for air transportation of property are subject to a 6.25 percent tax. There are exemptions to the air transportation tax for certain situations, including military personnel on international flights, sky diving and particular uses of helicopters.

Other Excise Taxes
The federal government imposes excise taxes on the manufacturers, producers and importers of gas-guzzler automobiles; sport fishing equipment; bows and arrows; tires; heavy trucks, trailers and tractors; coal; and vaccines. The tax is imposed at the time the item is sold by the manufacturer, producer or importer, and title passes.

  • The gas-guzzler tax is a tax on the sale of automobiles that have a fuel economy standard of less than 22.5 miles per gallon. Individuals that import automobiles for personal use may be liable for this tax.
  • There is a 10 percent tax on the sale of sport fishing equipment.
  • The tax on tires is based on weight.
  • The tax on vaccines is a fixed amount (75 cents) per dose of certain vaccines, including common vaccines for measles and mumps, sold by manufacturers in the United States.
  • A producer of coal mined in the United States is liable for tax on the first sale of such coal.

The federal government also imposes excise tax on many less common products and activities. State and local governments may impose excise taxes as well. Failure to file the required returns and pay excise taxes may result in the imposition of penalties, interest and other sanctions.

Contact Wilson Ratledge and let one of the attorneys assist you with your excise tax needs.