An Old Tool That Still Works
Dynasty Trusts also referred to as Legacy Trusts are an instrument that has been used by the wealthy to preserve the wealth and legacy of family assets for generations upon generations. Most of the high net worth families from the late 1800's to early 1900's enjoyed the benefits of the Dynasty Trust. It is also well known that the Kennedy's are still enjoying the benefits of the Dynasty Trusts established generations ago.
So What Is It, And How Does It Work?
A Dynasty Trust is an Irrevocable Trust used to pass wealth and assets to descendants of the person establishing the Trust. The trust does not leave assets to a spouse or the immediate children, but to grand-children, and in the past it was left to great-grand-children or even great-great-grandchildren. Essentially, a Grantor could leave a substantial estate to children multiple generations that he or she would never live to meet.
This process went on for many years and an extreme amount of wealth was passed on tax free. Eventually though the government saw how much money it wasn’t getting its hands on and cracked down on the practice. They created the Generation Skipping Tax: a law designed to prevent wealthy families from transferring their enormous wealth on without paying an inheritance tax. So, these trusts can no longer go on for generations after generation, since the government has now hedged themselves to ultimately get paid.
Some Exclusions Apply
However, the government has also provided for the gift tax exclusion. The amount varies depending on the current administration in Washington, but currently there is a $5.34 million (adjusted to inflation) gift tax exclusion which means that you can give away in your lifetime up to that amount tax free. After that, you pay a significant percentage in taxes on gifted transfers of wealth. For a married couple, you can double the amount to $10.68 million.
One other item that affects the Dynasty Trust is a complex and convoluted law called the Rule Against Perpetuities. This law limits the number of generations that can be skipped before the Trust must commence distributions. The law puts a time limit on the Trust so that the money cannot be held in trust forever and must eventually be distributed. There are many other rules to this law that we do not have time to deal with here, but simply put, the Rule states that the distribution must take place within 21 years after the last remaining beneficiary, alive at the time of the making of the Trust, dies.
Who Gets What?
As mentioned earlier, your children do not benefit from the principle of the trust; however they will receive the income from the trust during their lifetimes. Your grandchildren would be deemed the true beneficiaries, thereby receiving the assets in the trust, inheritance tax free.
We have only scratched the surface of the complexity and usefulness of this trust in this blog. A Legacy Trust is not for everyone and a lot of thought and planning must go into determining whether this trust accomplishes your goals and intent. However, when used, this Trust is extremely powerful, not only for preserving wealth but for its asset protection functionality. If you have not used up your lifetime gift exclusion and you are interested in preserving some family wealth for future generations, we recommend you contact our office to learn more about the Dynasty Trust.
For further information on how to protect the inheritance for your children and grandchildren, please take a look at our book, The Ten Biggest Estate Planning and Asset Protection Mistakes and How to Avoid Them 2nd Edition, available for FREE kindle download between September 26th and October 2nd, or for purchase from Amazon.com
At the Estate Planning & Asset Protection Law Center, we provide a unique education and counseling process which includes our unique 19 Point Trust, Estate and Asset Protection Review to help people and their families learn how to protect their home, spouse, life-savings, and legacy for their loved ones, click here for more information. We provide clients with a unique approach so they understand where opportunities exist to eliminate problems now as they implement plans for a protected future.
We encourage you to attend one of our free educational workshops, call 800-964-4295 and register to learn more about what you can do to enhance the security of your spouse, home, life savings and legacy.