First published in Legal Advisory, Vol. 13
Dynasty Trusts are specialized irrevocable trusts designed to shelter assets from transfer taxes over multiple generations, while at the same time allowing your heirs to enjoy the fruits of those assets.
Typically, after estate taxes and other settlement costs are paid, most people leave the bulk of their estate outright to their children. The children then either consume or invest their inheritance over their lifetime.
Assuming they are financially successful and grow their estate to the point where it will be subject to estate taxes, the process is repeated generation after generation with estate taxes being paid each time wealth is transferred to the next generation.
The government likes it this way. They like to take their share each time wealth is passed from one generation to the next. If you try to skip a generation and give assets directly to your grandchildren or great-grandchildren, they have set a limit on how much you can give without incurring what is know as the generation-skipping transfer (GST) tax.
This tax is in addition to the regular estate tax is currently set at the highest marginal estate tax rate (55 percent).
For 2000, each of us has a $1,030,000 GST exemption that can be used during lifetime or at death. The key to the Dynasty Trust technique is to leverage the GST exemption by transferring assets to the trust during your life, and electing to have the transfer covered by your GST exemption.
The trust is set up for the benefit of your children and grandchildren and perhaps even your great-grandchildren.
Your heirs can serve as trustees of the trust and can still have access to trust income during their life as well as limited access to principal.
If an independent trustee is used, even greater flexibility can be drafted into the trust language.
Another benefit of the Dynasty Trust is that the principal is protected from attachment by creditors of your heirs – this can be particularly useful in the event of a lawsuit or a divorce. By combining the use of your applicable exclusion amount (which currently allows the lifetime transfer of $675,000 of assets into trust without incurring any gift tax) with the GST exemption, you can establish a Dynasty Trust without incurring any transfer taxes. A married couple can thereby transfer $1,350,000 into such a trust.
Ideally, this money should be invested in assets with long term growth potential since the growth of these assets will not be included in your estate or your heir’s estates for tax purposes.
This article only touches on the basics of this sophisticated concept;. To avoid costly mistakes, it is imperative that you consult with an attorney specializing in advanced estate planning as well as a knowledgeable financial planner or insurance agent or certified public accountant.
