Estate planning for many people is mostly about making sure the future generations are taken care of. There are various methods for doing this through an estate plan. One effective option is through utilizing some type of trust-based strategy. If you are looking to not only take care of the next generation but also the generations after that, you may want to consider creating a dynasty trust.
What is a dynasty trust?
This type of trust is designed to avoid incurring transfer taxes, such as estate tax, gift tax or generation-skipping transfer tax (GSTT). Your beneficiaries for multiple generations will be able to avoid these types of taxes as long as the assets stay in the trust. If the dynasty trust is properly formed, it can last for multiple generations or even forever.
Legal basis for a dynasty trust
In the past, trusts were only legally allowed to last for a specific number of years. Many states had laws which regulated when a trust needed to end, usually 21 years following the death of the final beneficiary. This would mean a trust could potentially endure for around 100 years. However, many states have eliminated these rules, allowing trusts to last for multiple generations.
How does a dynasty trust work?
Usually, the grantor of a dynasty trust will name his or her children as the beneficiaries. Following the death of the grantor’s last child, the grandchildren or great grandchildren will be the beneficiaries. The trustee is the entity in charge of administering and managing the assets in the trust in accordance with the rules of the trust documents. Generally, the trustee of a dynasty trust will be a bank or some other type of financial institution.
A dynasty trust is an irrevocable trust which means the grantor will lose control of the assets once these assets are entered into the trust. However, the grantor, when creating the dynasty trust, will design strict rules which determine how the trustee is to manage and administer the trust assets.
On the other hand, you should know, as a grantor, you will not be able to amend these rules once the trust is in place. This also applies to future beneficiaries of the trust who will have no power to alter the terms of the dynasty trust.
Therefore, make sure to consult with a legal professional to make sure you understand the implications of your trust strategy.
Trust assets will only be liable for gift tax and GSTT taxes upon transferring of assets above the value of current federal tax exemptions. In accordance with the Tax Cuts and Jobs Act of 2017, the federal tax exemption for 2022 is $12.06 million. The exemption amount is adjusted to inflation each year. Also, lawmakers may on occasion make changes to the exemption, therefore it is a good idea to keep up to date with the latest changes in the relevant law.
Integrating a dynasty trust into an estate plan
Deciding on a dynasty trust is just one part of a comprehensive estate plan. There are many other factors to consider when forming your estate planning strategy. Budgeting, life insurance and various other items should be customized to fit your specific circumstances and objectives.
Let Independent Financial Services help create a financial plan which works with your estate plan. If you don’t have an estate plan, call us and we can put you in contact with one of our professional legal contacts.
While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.