What Is a Dynasty Trust? – Annapolis and Towson Estate Planning

Do not be put off by the term “dynasty.” Just as every person has an estate, even if they do not live in a million-dollar home, every person who owns assets could potentially have a dynasty trust, even if they do not rule a continent. If you have assets that you wish to pass to others, you need an estate plan and you may also benefit from a dynasty trust, says this recent article from Kiplinger, “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust.”

When parents die, assets are typically transferred to their descendants. In most cases, the assets are transferred directly to the heirs, unless a trust has been created. Estate taxes must be paid, usually from the assets in the estate. Inheritances are divided according to the will, after the taxes have been paid, and go directly to the beneficiary, who does what they want with the assets.

If you leave assets outright to heirs, when the beneficiary dies, the assets are subject to estate taxes again. If assets are left to grandchildren, they are likely to incur another type of taxes, called Generation Skipping Transfer Taxes (GSTT). If you want your children to have an inheritance, you will need to do estate planning to minimize estate tax liability.

If you own a Family Limited Partnership (FLP) or a Limited Liability Company (LLC), own real estate or have a large equity portfolio, you may have the ability to use gifting and wealth transfer plans to provide for your family in the future. You may be able to do this without losing control of the assets.

The “dynasty trust,” named because it was once used by families like the DuPont’s and Fords, is created to transfer wealth from generation to generation without being subject to various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, depending upon applicable state laws. A dynasty trust can also be used to protect assets from creditors, divorcing spouses and others seeking to make a claim against the assets.

Many people use an Irrevocable Life Insurance Trust (ILIT) and transfer the assets free of the trust upon death. Most living trusts are transferred without benefit of being held within trusts.

A dynasty trust is usually created by the parents and can include any kind of asset—life insurance, securities, limited partnership interests, etc.—other than qualified retirement plans. The assets are held within the trust and when the grantor dies, the trust automatically subdivides into as many new trusts as the number of beneficiaries named in the trust. It is also known as a “bloodline” trust.

Let us say you have three children. The trust divides into three new trusts, dividing assets among the three. When those children die, the trust subdivides again for their children (grandchildren) in their own respective trusts and again, assets are divided into equal shares.

The trust offers broad powers for health, welfare, maintenance and support. The children can use the money as they wish, investing or taking it out. When created properly, the assets and growth are both protected from estate taxes. You will need a trustee, a co-trustee and an experienced estate planning attorney to draft and execute this plan.

Reference: Kiplinger (Oct. 2, 2021) “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Use A Dynasty Trust to Protect Your Wealth – Annapolis and Towson Estate Planning

Using an irrevocable trust ensures a far smoother transition of assets than a will and also offers significant tax savings and far more privacy, control and asset protection, begins the article “Dynasty Trusts: Best Way to Protect Family Wealth” from NewsMax.

Just as their name implies, a dynasty trust is king of all trust types. It gives the family the most benefits in all of these areas. Still not convinced? Here are a few reasons why the dynasty trust is the best estate planning strategy for families who want to preserve an estate across many generations.

Most trusts provide for the transfer of assets from one benefactor to the next generation, at most two or three generations. A dynasty trust can last for hundreds of years. This offers tax advantages that are far superior than others.

Under the new tax laws, an individual can gift or bequeath up to $11.4 million during their lifetime, tax free. After that limit, any further transfer of assets are subject to gift and estate taxes. That same transfer limit applies whether assets are left directly via a will or indirectly through a trust. However, in a direct transfer or trust, these assets may be subject to estate taxes multiple times.

If a grantor transfers assets into a dynasty trust, those assets become the property of the trust, not of the grantor or the grantor’s heirs. Because the trust is designed to last many generations, the estate tax is only assessed once, even if the trust grows to be worth many times more than the lifetime exclusion.

Not all states permit the use of dynasty trusts. However, five states do allow them, while six others allow trusts with lifespans of 360 years or more. An experienced estate planning attorney will know if your state permits dynasty trusts and will help you set one up in a state that does allow them if yours does not. Nevada, Ohio and South Dakota provide especially strong asset protection for dynasty trusts.

Because dynasty trusts are passed down from generation to generation, trust assets are not subject to the generation-skipping transfer tax. This tax is notorious for complicating bequeathals to grandchildren and others who are not immediate heirs.

When the dynasty trust is created, the grantor designates a trustee who will manage trust funds. Usually the trustee is a banker or wealth manager, not a trust beneficiary. The grantor can exert as much control as desired over the future of the trust by giving specific instructions for distributions. The trustee may only give distributions for major life events, or each heir may have a lifetime limit on distributions.

With these kinds of safeguards in place, a benefactor can ensure that the family’s wealth extends to many generations. Speak with an estate planning attorney to learn about the laws concerning dynasty trusts in your state and see if your family can obtain the benefits it offers.

Reference: NewsMax (September 16, 2019) “Dynasty Trusts: Best Way to Protect Family Wealth”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Why Should I Think About a Dynasty Trust? – Annapolis and Towson Estate Planning

A dynasty trust is a trust that lasts longer than one generation below that of the grantor. This trust can be a worthwhile estate planning tool for multi-generational families. Forbes’ recent article, “2 Reasons To Consider A Dynasty Trust” explains that dynasty trusts have two unique benefits that make them attractive.

Generation-Skipping Transfer Tax (GST) Exemption. According to the American Bar Association, the GST tax is imposed on asset transfers to grandchildren and more remote descendants that exceed the exemption limits. As a result, the transferor can’t avoid transfer taxes by “skipping” a generation. The GST is imposed, in addition to gift and estate taxes.

A person can give up to $11.4 million in assets (the GST tax-exempt amount) to a trust in 2019. Trust assets are protected from transfer taxation for as long as the trust document and state law permit it. A dynasty trust uses the federal GST tax exemption by taking family wealth out of the transfer tax system for as long as the trust is in existence; income and principal is used to benefit each succeeding generation.

An additional benefit is that the GST tax exemption can often be extended, by transferring assets subject to valuation discounts.

Grantor Trusts Provide More Tax Benefits. In most cases, grantor trusts treat the trust creator as the owner of the trust assets for income tax purposes. This allows the trust principal to grow free of income tax. Creating the trust as a grantor trust adds another level of tax benefit to a dynasty trust.

The estate planning benefits of the asset transfer are increased by the grantor making the income tax payments instead of the trust. In other words, the assets in the trust aren’t reduced by income taxes. Any income taxes paid by the grantor reduce the size of the grantor’s overall taxable estate when calculating estate taxes.

There are a number of strategies a person can implement using dynasty trusts. You can discuss all your choices with an experienced estate planning attorney.

Reference: Forbes (July 23, 2019) “2 Reasons To Consider A Dynasty Trust”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys