Published Tuesday, January 10, 2012 at: 7:00 AM EST
You’ve worked hard to achieve success in business and your personal financial life. Now, it makes sense to take steps to preserve the wealth you’ve accumulated, so your descendants can enjoy some of the fruits of your labor. You may also want to communicate of the personal values you’ve lived by. A dynasty trust can do all of that—minimizing estate taxes, providing protection for your family, distributing assets in a way that reinforces your values, and perpetuating itself for generations to come.
Unlike corporations, partnerships, and other business entities, most trusts are not perpetual. Most kinds of trusts are established with a finite term that is either a specified length of time or is tied to an event—for example, a beneficiary reaching the age of majority. Indeed, under the common law “rule against perpetuities” and many modified state law versions of the rule, a trust’s duration must be limited. However, some states do permit properly structured trusts—dynasty trusts—to have a term spanning several generations or to last indefinitely.
The basic structure of a dynasty trust is relatively simple. You transfer selected assets—it could be a combination of stocks, bonds, and real estate—into a trust managed by an independent trustee, usually a financial professional or an institution. The trust may be created as an “inter vivos” transfer during your lifetime or as a testamentary transfer through your will. Once established, such a trust is irrevocable. You can’t control it directly or change beneficiaries.
The trustee is responsible for investing trust assets. Depending on the trust’s rules, income may continue to accumulate inside the trust or it may be paid out to beneficiaries, usually your children and other descendants. The trustee may also have discretion to use trust principal for the health, education, support, or maintenance of the beneficiaries or in other specified circumstances. But the goal is for the trust to be managed so that it will preserve most of its assets for the benefit of future generations.
One chief objective of a dynasty trust may be to minimize taxes. Transferring assets to the trust removes them from your taxable estate. Under the American Taxpayer Relief Act (ATRA), you can contribute up to $5 million to the trust (indexed to $5.49 million for 2017) — or $10 million as a couple (indexed to $10.98 million for 2017) — without owing gift or estate taxes. Not only does ATRA retain this generous exemption for 2015 and thereafter, it permanently extends the provision allowing "portability" of exemptions between spouses.
Although transferring assets through the trust to your grandchildren could trigger a generation-skipping tax (GST), there’s also now a $5 million GST exemption (indexed to $5.49 million for 2017) to shelter the transfer from this tax—but there’s no portability of GST exemptions.
A dynasty trust can also be set up to help perpetuate values you hold dear. If you want your heirs to adopt your strong work ethic or your charitable inclinations, your trust might impose requirements related to those values that beneficiaries must fulfill in order to receive funds. There could be rules related to working at particular kinds of jobs, demonstrating a commitment to charity, or meeting other kinds of ethical or religious benchmarks. Your trust can be set up to help heirs avoid the “trust baby” syndrome that has often plagued wealthy families and to prevent spending sprees by irresponsible children or grandchildren.
A third objective in setting up a dynasty trust may be to provide protection from creditors. Because the trust, rather than its beneficiaries, owns the assets, creditors of your heirs won’t have access to the assets. And a dynasty trust’s indefinite or perpetual term means that protection will also be long lasting. This feature can also safeguard assets against claims by a divorcing spouse.
Keep in mind that while you can’t control a dynasty trust directly, you may reserve the right to hire and fire trustees and to provide guidance about investment policy. If you still think a dynasty trust might benefit your family, it could be important to act soon, while the current estate tax provisions are in effect. Moreover, federal officials have said they would like future rules to limit the duration of dynasty trusts. We can work with you and your attorney to see how a dynasty trust might be integrated into your overall financial plan.
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