When most people undergo estate planning their main goal is to provide to their intended heirs generational wealth which can help them live more fulfilling lives after you have passed away and left them your assets. There are various estate planning strategies that you can choose from to fulfill this objective. One effective method is to use a dynasty trust.
Dynasty trust basics
A dynasty trust is especially designed to transfer wealth from generation to generation while also avoiding transfer tax liabilities, such as estate tax, gift tax or generation-skipping transfer tax (GSTT). Assets kept in the dynasty trust will be exempt from these types of taxation as long as the assets are kept in the trust. Ideally, the dynasty trust will be designed to last for several generations.
Legal status of dynasty trusts
Throughout much of the nation’s history there have been state laws that limited how long a trust duration can be. A common rule implemented by state governments is to not allow a trust to continue for more than 21 years after the last beneficiary of the trust has died. This would mean a trust would have the potential duration of approximately 100 years. However, many states have revoked their laws against perpetuity which means that trusts would be allowed to last for many future generations.
Dynasty trusts are considered irrevocable which means that the grantor cannot change the terms of the trust or revoke the trust once assets have been put into the trust. Also, beneficiaries are not allowed to change terms of an irrevocable trust either. Future beneficiaries of a dynasty trust are also prohibited from altering the trust terms which outline how assets are to be managed and distributed.
Generally, the initial beneficiaries of a dynasty trust are the children of the trust’s grantor. After the last child passes away the beneficiaries will usually be the grandchildren and then the great grandchildren and so on.
Management of dynasty trust assets
Assets held in a dynasty trust will be managed and controlled by a trustee that is appointed by the grantor. Usually, a financial institution or banking firm will be chosen by the grantor to be trustee of a dynasty trust.
Gift tax and GSTT taxes are only owed when assets are transferred above the value of current federal exemptions. The amount exempted via federal law is adjusted for inflation annually. Your financial advisor can help you determine the current federal tax exemptions and how to deal with them.
On the other hand, assets remaining in the trust that produce income will still result in income tax liability for the trust. Many people will strategically deposit mostly non-income producing assets to help avoid income tax burdens. This might include stocks that do not pay a dividend or tax-free municipal bonds.
Is a dynasty trust right for you?
A dynasty trust is really only one option available to you when creating an estate plan. There are different types of trusts and estate planning instruments that you can integrate into your generational wealth strategy. Talking with a financial expert can better clarify what mix of estate planning tools is the best option for your situation and objectives.