DYNASTY TRUSTS

With good planning, assets may be partially transferred to succeeding generations without triggering the GST. Although it sought to prevent most generation skipping transfers from occurring, Congress decided to give individuals the right to transfer to future generations a limited amount of property free of the GST. In addition to the estate tax exclusion amount, every individual has an equal generation skipping tax exemption.

It is important to realize that the generation skipping tax is imposed in addition to the estate tax. If a grandparent attempts to transfer more than the GST exempt amount collectively to the grandchildren, first estate taxes and then GST taxes will be imposed on the transfer. When the two taxes are combined, most of the estate can be consumed by taxes.

The GST exemption available to you provides a wonderful planning opportunity when used in combination with other estate tax planning techniques. That opportunity is called a Dynasty Trust.

A Dynasty Trust is a special trust established for those who desire to make full use of an individual’s right to pass assets to grandchildren or other descendants and thereby skip a generation without the GST being imposed. Since the GST exemption applies to all individuals, married couples can shelter two times the GST exempt amount from GST taxes. This means that if you are married, you and your spouse can leave twice the GST exempt amount in trust for the benefit of succeeding generations in such a way that those assets will never again be subject to estate taxation. The wealth in your Dynasty Trust would then pass from generation to generation estate tax free and provide your descendants funds for their health, support, and education. The limitation that distributions can only be made for health, support, and education is enough to keep the trust assets out of the beneficiary’s estate while providing maintenance of the beneficiary’s lifestyle.

There is no reason why a Dynasty Trust cannot be incorporated into your individually designed Revocable Living Trust. As is the case with all revocable trusts, the planning opportunities are endless. For example, the Dynasty Trust can provide first for the care of your children and thereafter for your grandchildren and succeeding generations. If you want to prevent the possibility of having the trust assets entirely consumed by your children, you could restrict the use of trust assets by your children to only specific purposes. After the last of your children dies, the remaining trust assets could pass to individual trusts established for each of your grandchildren. This funding pattern could repeat through generations, subject only to the limits of state law on the existence of the trust. Several states have no artificial end to the length of time trusts can exist, and creation of a trust in one of these states can allow a multigenerational trust to last forever.

Apart from providing for your children and grandchildren, Dynasty Trusts can also provide them with asset protection from abusive creditors, lawsuits, and even from failed marriages. The assets generally cannot be taken by outsiders or in divorce proceedings because they are owned by the trust, not by your child or grandchild.

Additionally, as long as the Dynasty Trust does not allow the beneficiary too much access (distributions for a beneficiary’s health, education, maintenance and support are acceptable), the assets are never regarded by the IRS as being “owned” by your beneficiaries and are not taxed in their estates. This allows a terrific opportunity for the estate tax-free growth of the assets not used to take care of the beneficiaries.

To see just how powerful estate tax-free compounding of interest can be over an extended period of time, consider the following example: If trust assets grow annually at only six percent, one million dollars grows to over eighty million dollars in the seventy five years it would take for it to pass through three generations. During all of that time your descendants would have comfortable access to interest earnings and could even spend it all if needed (i.e., for a health crisis). Further, if they bought and retained assets in the name of the trust, they would always have the dual benefits of asset protection and estate tax-free growth.

Conversely, assume that your family does not create a Dynasty Trust and the one million dollars similarly grows at six percent over seventy-five years. If each generation is taxed at fifty-five percent, after seventy-five years the money will have grown to be only slightly more than seven million dollars. Using conservative numbers, over a seventy-five year period the difference between using a Dynasty Trust and not using a Dynasty Trust is about seventy-three million dollars!

A revocable trust is just one of the estate planning tools available to take advantage of Dynasty Trust planning. Irrevocable Life Insurance Trusts provide another vehicle by which parents can use Dynasty Trust planning to benefit their children, grandchildren, or both. If done correctly, the generation skipping tax exemption can be applied to the money gifted to the ILIT and used to pay the insurance premiums. In this scenario, the amount of the GST exemption used up is the amount of the gifts used to pay the life insurance premium and not the insurances death benefit. For example, if a grandparent gifted one hundred thousand dollars to an Irrevocable Life Insurance Trust established
to benefit the grandchildren, ILIT Trustee could use it to purchase a life insurance policy worth several times the gift. The GST exemption would then be used to offset the GST taxes due, but the amount of the GST taxes is based only on the gifted amount of the premiums rather than the higher death benefit! This enables a large amount of life insurance to be purchased tax-free and used tax-free by mulitple generations. This is just one example among a number of other opportunities that are available for you to take advantage of with Dynasty Trust planning.

Whether your estate is large or small, a Dynasty Trust can provide significant estate planning benefits. Do you want your grandchildren’s inheritance, however modest or great, to be protected from abusive creditors, lawsuits, or future divorces? Do you want mulitple generations of your descendants to receive their inheritance federal estate tax-free? If you answer, “yes” to either of these questions, then you should seriously consider implementing a Dynasty Trust to protect your family.