Founder Reference Library Illustrative Example

Overview

A foundational estate plan establishes the legal framework for asset transfer, incapacity management, and wealth preservation. For a founder in their mid-30s with significant anticipated liquidity from an upcoming exit, this baseline layer is essential before more complex structures — the Dynasty Trust, grantor trust elections, charitable vehicles — are layered on top. Allegiance recommends engaging a trusts & estates attorney from its Trusted Advisor Bench to complete the Basic Estate Plan.

Core Documents Required

NY Estate Tax — The Cliff Effect

• NY exemption (2026): ~$7,160,000
• Cliff threshold (105% of exemption): ~$7,518,000 — above this, ALL assets are taxable, not just the excess
• Rate on amounts above the exemption: ~16%
• Planning action: use the Dynasty Trust to remove assets from the gross estate entirely

Federal Estate Tax Parameters (2026)

Immediate Priorities

• Draft and execute all core documents before any exit-related activity — engage T&E counsel now
• Name an executor and trustee — consider an institutional trustee for the Dynasty Trust
• Establish the Dynasty Trust now, before the exit — see Appendix D
• Use the $19,000/year annual gift exclusion per beneficiary to fund the trust incrementally
• Review beneficiary designations on all financial accounts and retirement plans
• Upon marriage, the exemption doubles to $30M combined — plan SLAT/SLANT at that stage (Appendix G)

QSBS — §1202 Overview

Section 1202 of the Internal Revenue Code allows non-corporate taxpayers to exclude up to 100% of gain on Qualified Small Business Stock (QSBS) held for more than 5 years. For Delaware C-Corp founders, this is often the single most valuable tax provision available — potentially eliminating millions in federal tax.

Qualification Requirements — Illustrative NYC Founder

NYS Conformity — 2026 Update

DAF — Donor Advised Fund Strategy

A Donor Advised Fund (DAF) allows a founder to make a tax-deductible charitable contribution of appreciated stock before a liquidity event, avoiding capital gains entirely and receiving an immediate deduction.

• Timing: contribute QSBS shares to the DAF before any sale agreement is signed
• Deduction: full FMV deduction up to 30% of AGI; 5-year carryforward for excess
• Gain avoidance: the DAF is tax-exempt — no capital gains on appreciated stock inside the DAF
• Grant flexibility: grants to IRS-qualified charities over time; no payout deadline
• Minimum contribution: most major DAF sponsors (Fidelity, Schwab, Vanguard) accept $5,000+
• QSBS interaction: contributing pre-exclusion shares to the DAF creates a double benefit — exclusion + deduction

What Is the Dynasty Trust?

The Dynasty Trust is an irrevocable trust established to hold an independent slice of the company — illustrated here at 5% — for the benefit of the founder's descendants (children, current or future). Delaware situs is recommended for its favorable trust law (Appendix E) and its abolition of the Rule Against Perpetuities, allowing the trust to benefit multiple generations without a forced termination date.

Key Structural Features

• Situs: Delaware — no state income tax on undistributed trust income; strong privacy laws
• Irrevocable — assets removed from the founder's estate; spendthrift provisions protect from creditors
• Beneficiaries: the founder's descendants — a true multi-generational, dynasty structure
• Flexible distributions — trustee has discretion over income/principal distributions to beneficiaries
• Grantor trust option — founder can pay trust income taxes personally, an additional tax-free gift at 38.6% (Appendix G)

QSBS Shelter at the Illustrative Exit

At the illustrative $75M exit, the Dynasty Trust's 5% slice is worth $3,750,000. Because this is well under the trust's own $10,000,000 QSBS exclusion cap, the entire trust gain can be sheltered from federal (and NYS-conforming) capital gains tax once QSBS qualification is confirmed — no multi-trust structuring is required at this exit size.

Note: at a larger exit valuation, if the trust's share of proceeds were to exceed the $10M single-trust cap, splitting into multiple sub-trusts — one per beneficiary — can multiply the available exclusion. T&E counsel can model this if and when it becomes relevant.

Trustee Selection

• Independent individual trustee — flexibility, personal relationship, lower cost; succession risk
• Institutional / corporate trustee (bank trust dept.) — continuity, expertise, regulated; higher cost
• Directed trust structure — institutional administrative trustee + investment advisor (Allegiance) as advisor
• Trust Protector — third party with power to modify trust, change trustees, or adapt to law changes

Beneficiary Designations & Funding Timing

Beneficiaries: the founder's descendants — children, current or future. As a true dynasty structure, the trust is designed to benefit not only the first generation but their descendants as well, taking advantage of Delaware's abolition of the Rule Against Perpetuities.

Funding timing: gifting the trust's 5% slice now at today's ~$15M valuation uses only $750,000 of lifetime exemption, versus $3,750,000 if gifted at the $75M exit valuation instead — funding early is one of the highest-value planning actions available.

Action: confirm structure and drafting with T&E counsel before funding.

Why Delaware?

Trust situs (legal jurisdiction) determines which state's laws govern the trust and whether undistributed trust income is subject to state income tax. Delaware offers the most favorable combination of tax treatment, legal flexibility, privacy, and duration for the Dynasty Trust.

Delaware Advantages

Comparison: NY vs. Delaware Trust Situs

Grantor vs. Non-Grantor Trust — Income Tax Treatment

Every irrevocable trust is classified as either a Grantor Trust or a Non-Grantor Trust for income tax purposes. This classification determines who pays the income tax on trust earnings — and has profound implications for how quickly the trust corpus compounds (see Appendix M).

SLAT & SLANT — Spousal Trust Examples (Future Planning Upon Marriage)

SLATs and SLANTs are irrevocable trusts that include a spouse as a lifetime beneficiary. They are presented here as examples of how Grantor/Non-Grantor classification interacts with spousal access. These are future structures — not relevant until marriage. The Dynasty Trust (Appendix D) is established now, before marriage, for the founder's descendants, without spousal provisions.

• Structure: irrevocable trust; grantor spouse transfers assets; beneficiary spouse has discretionary access
• QSBS: LOSES §1202 exclusion — trust treated as grantor trust; gain taxed to grantor at time of sale
• Use case: married couples prioritizing spousal access over QSBS optimization

• Structure: SLAT with 'adverse party' consent required for distributions — breaks grantor trust status
• QSBS: PRESERVES §1202 exclusion — non-grantor treatment means the trust qualifies as a separate taxpayer
• Use case: married couples who want spousal access AND to preserve QSBS eligibility

Comparison Table

Overview

A liquidity event is an optimal moment to establish a charitable giving strategy. The combination of a large capital gain, QSBS exclusion, and anticipated family growth creates multiple planning opportunities. Vehicles range from simple (DAF) to sophisticated (private foundation).

Donor Advised Fund (DAF)

• Simplest vehicle — contribution is irrevocable; grants recommended over time
• Deduction: FMV of assets contributed; avoids capital gains on appreciated stock
• Minimum contribution: $5,000 (Fidelity Charitable, Schwab Charitable, others)
• No annual payout requirement — flexible grant timing
• Best for: immediate deduction at exit + ongoing philanthropy

Charitable Remainder Unitrust (CRUT)

• Contribute appreciated stock / QSBS — no immediate capital gains tax
• Trust pays out a fixed % (commonly ~5%) of corpus annually to the founder for life or a term of years
• Remainder to charity at termination — partially deductible at contribution
• Income stream diversifies the founder's cash flow post-exit
• Best for: income need + charitable intent + a large appreciated position

Private Foundation

• Full control over grant-making; family members can serve as officers
• Deduction limited to 30% AGI (cash) / 20% AGI (appreciated property)
• 5% annual distribution requirement; excise taxes on investment income
• Best for: significant philanthropic intent ($5M+), family legacy, grant-making control
• Higher administrative cost; subject to self-dealing rules

What Is an Estate Freeze — and Why Does It Matter?

An estate freeze transfers appreciating assets into the Dynasty Trust today, so that all future growth accrues outside the taxable estate. The question is not just 'how big does the trust get?' — it is 'how much does the family receive in total, after estate tax, compared to doing nothing?' The three scenarios below compare all assets on a consolidated basis from the same starting point.

Same starting capital in all cases: Founder personal proceeds $15,000,000 + Dynasty Trust proceeds (5% of a $75M exit) $3,750,000 = $18,750,000. Founder age at exit: 37 · Life expectancy: 82 (SSA actuarial default) · 45 years of compounding.

Gross return: 6.5% · Combined income tax rate: 38.6% · Net after-tax: ~3.99% · Grantor Trust: 6.5% (full gross) · Estate tax: Federal 40% (above $15M exemption) + NY ~16% (cliff triggered on estates this size) — illustrative combined rate 50%, adjustable by state in the Founder Exit Toolkit's Post Exit Tax Planning calculator.

Consolidated Family Wealth at Death (Life Expectancy) — All Assets, After Estate Tax

* Non-Grantor: taxable estate is the founder's personal assets only — the trust's $21,819,270 passes estate-tax free (included in Net to Family, not shown separately). Grantor: the founder pays the trust's income tax personally each year; at life expectancy the model shows personal assets of $45,304,733 remaining (no swap/toggle to non-grantor status was triggered over this horizon) while the trust itself has grown to $63,791,618, passing entirely free of estate tax.

Why the Estate Freeze Wins — Despite Starting with the Same Capital

• Grantor Trust advantage vs. Unplanned: +$31,895,809 to family at life expectancy
• The trust passes estate-tax free; the unplanned estate loses nearly half its value to estate tax on its own growth
• Grantor election adds a further $20,986,174 vs. Non-Grantor — from paying the trust's tax bill personally, an additional tax-free gift

Net to Family at Key Milestones (All Assets, After Estate Tax)

All scenarios start from identical capital: $18,750,000. Estate tax applied at death in each year shown. Grantor Trust: founder pays trust income tax personally; trust passes free of estate tax. Figures mirror the interactive Estate Freeze calculator in the Founder Exit Toolkit at its default settings.