Understanding Dynasty Trusts
Understanding
Dynasty Trusts
DISCUSSION TOPICS
What is a Dynasty Trust?
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What is a Dynasty Trust?
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How to Set Up a Dynasty Trust
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What are the Benefits of a
Charitable Lead Trust?
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INVEST Trust Services
Dynasty Trusts are long-term trusts created specifically for descendants
of multi generations. Dynasty Trusts can last for 100 or more years. The
Dynasty Trust, like any other trust, has a trustee that administers it. The
trustee can use trust income or principal for the benefit of the Trust’s
beneficiaries. When a qualified estate planning attorney is drafting your
Trust, you need to inform the attorney just how narrow or broad you
want the trustee’s discretion to be. The beneficiaries of your Dynasty
Trust can be classified as living beneficiaries when you set up the Trust
and expected future beneficiaries (i.e. great grandchildren) that can enjoy
the benefits of the trust long into the future.
“Dynasty Trusts are longterm trusts created specifically for descendants
of multi generations.”
The Dynasty Trust can allow responsible beneficiaries to have greater access and benefit from the assets in your Trust. Financially irresponsible
beneficiaries most likely will be given less access; and the trustee will
apply strict conditions (usually referred to as “spendthrift clauses”) before
the trustee makes distributions to them. These “instructions” to the
trustee will be provided by you in the language of the Trust agreement.
By limiting Trust beneficiaries’ access, such spendthrift clauses can also
prevent creditors of a beneficiary from attacking the Trust’s assets for the
beneficiaries’ indebtedness, or prevent a beneficiary’s divorcing spouse
from laying claim to the Trust assets.
An attractive benefit that you will receive in establishing a Dynasty Trust
lies in the reduction or elimination of federal estate tax liability on your
estate and on future beneficiary’s estates. In today’s tax system, estate and
gift taxes are collected every time assets change hands from one generation to the next. Dynasty Trust can avoid those taxes by creating a second estate that could outlive most of your family members and continue
providing for future generations. Dynasty Trusts are most often funded
using your Federal Estate Tax Credit. Further tax savings occur in the
future at the time of deaths of your descendants. Even after the Trust’s
assets have been accumulating for years, they remain free from Federal
Gift and Estate Taxes for the life of the Dynasty Trust.
“The spendthrift clauses
in the Trust for the grandchildren may be worded
in such a way that the
trustee must first verify
that each beneficiary of
the Trust be able to support himself or herself
on their own before any
distribution would be
made to them”
In 1986, Congress attempted to thwart these tax advantage transfers by
creating the “Generation-Skipping Transfer Tax” (GSTT). The GSTT is
applied to the Dynasty Trust by assuming that the Trust’s beneficiaries
own the assets in the Dynasty Trust outright.
However, Congress did include a significant exemption in the law. Every person has a GSTT exemption of $1 million ($2 million if married
and the Trust is funded by both spouses). That means each person can
transfer up to $1 million to a Dynasty Trust, without any GSTT. Dynasty
Trusts of $1 million or less offer the same gift and estate tax advantages of
similar trusts created before 1986.
Most often, the “grantor” of the Trust (the individual who originally
creates the Trust) usually wants to establish it for his/her grandchildren. This is why the Dynasty Trust is most often called a “GenerationSkipping Trust”. The Trust may not provide any benefit to the Grantor’s
children, and skips over them to provide for their Maintenance, Education, Health and Support (MESH) of the grantor’s grandchildren and
great grandchildren. Or the Trust may provide instructions to the Trustee
to make the grandchildren the preferred beneficiaries.
The spendthrift clauses in the Trust for the grandchildren may be worded
in such a way that the trustee must first verify that each beneficiary of the
Trust be able to support himself or herself on their own before any distribution would be made to them.
The Dynasty Trust itself can be created during your lifetime, or a portion
of your estate can be used to fund the Dynasty Trust at the time of your
death. In order to avoid gift taxes on the transfers during your lifetime,
you may elect to use all of part of your “Unified Credit Exemption” and
“annual gift tax exemption”. Creating a Dynasty Trust while you are alive
allows you to maximize your $1 million GSTT exemption. The Dynasty
Trust will shelter not only the value of the assets transferred inside of the
Trust, but also any appreciation of those assets. This means that by funding the Trust during your lifetime with the $1 million GSTT, if the assets
grow in value prior to your death their appreciation is not subject to any
further estate taxation. Had you waited to transfer them to the Dynasty
Trust at the time of your death, only a portion of them would qualify for
the GSTT exemption.
Dynasty Trusts should only be funded with certain types of assets. The
IRS taxes the income from these Trusts very heavily, sometimes close to
40%. As a result, the assets placed inside the Dynasty Trust should incorporate a tax-advantaged investment management strategy by the Trustee.
Non-dividend growth stocks and tax-free municipal bonds are favorable
investments for the Trust.
Many grantors of Dynasty Trusts choose to use their Trust as an Irrevocable Life Insurance Trust. The contributions you make into the Trust
are used to purchase a life insurance contract on your insurable interest.
When the grantor dies, the life insurance’s death benefit proceeds become
the principal of the Trust for many future generations.
For instance, a 45-year-old person may be able to purchase a $20 million
paid up life insurance policy by contributing $100,000 per year to the
Trust for a period of 10 years.
While Dynasty Trusts were originally created by a handful of industrialists and wealthy entrepreneurs of the 1900s, they are not necessary
estate planning tools for just the wealthy. However, while any one can
create a Dynasty Trust, the Trust itself must be established in states that
have repealed the “rule against perpetuities”. This rule provides that all
Trusts must have a distribution of the assets of the trust after a specific
number of years after the grantor dies or after the last named beneficiary
of the trust dies. Establishing a Dynasty Trust in those states that have
repealed the “rule” will allow your Trust to continue from many years in
the future. You should check with a qualified estate planning attorney to
make sure that your Dynasty Trust is properly set up to avoid the “rule”
and that it is set up in those States that have repealed the “rule”. INVEST
Trust Services can serve as the Trustee of your Dynasty Trust and have it
established in Delaware that has repealed the “rule”.
How to Set Up a Dynasty Trust
• Determine the amount of money to use to set up the Trust.
• Choose a Trustee that can administer the Trust in a State that has
repealed the Rule Against Perpetuities. Since the trust can last for a
very long time, it is always best to use a corporate trustee. They do
not die or move away as is the case with family members.
• Decide whether to fund the Dynasty Trust upon your death or during
your lifetime.
• Consider the use of life insurance in your Dynasty Trust.
• Use an experienced estate planning attorney to set up your Trust.
• Place proper stipulations in the Dynasty Trust that prevents your
children, grandchildren and great grandchildren from becoming
“trust-fund kids” and allows the trustee to preserve the Trust’s life for
future generations through proper spendthrift provisions.
• Never fund A Dynasty Trust during your lifetime with assets or
property that you may need to financially survive. Once they have
been placed in the Trust you cannot take them back. The transfer is
an irrevocable transfer.
• Remember, while a Dynasty Trust is a great tool to reduce or eliminate your Federal estate tax liability, there are other ways and means
to accomplish the same advantage. Using Marital Deduction Trust
and Credit Shelter Trusts can accomplish the same goal; and they can
also provide support and benefit for multi-generations of heirs.
“The Trust itself must be
established in states that
have repealed the “rule
against perpetuities.”
Benefits of a Dynasty Trust
• Ability to transfer wealth to future generations without assets becoming subject to the claims of an ex-spouse, creditor or the Internal Revenue Service.
• Capacity to transfer wealth from one generation to another generation long
into the future.
INVEST Trust Services offers a complete suite of trust services.
INVEST Trust Services is a Trust Representative Office
of National Advisors Trust Company, NATC. The
Trust Company is one of the largest independent trust
companies in the nation. It is governed by the Office of
Thrift Supervision, (“OTS”), a bureau of the U.S. Treasury
Department. The Trust Company is also a member of
the Federal Deposit Insurance Corporation (“FDIC”). By
law, the Trust Company segregates all trust account assets
from the capital assets of the Trust Company, ensuring
they are never subject to potential creditor claims against
the Trust Company.
The Trust Company has a professional team of
experienced trust executives that will serve all of your
trust needs. Please contact your Trust Relationship
Manager at INVEST Trust Services for more information.
This information is general in nature and should not be
construed as tax or legal advice. INVEST Trust Services
does not provide tax or legal advice. Please consult your
tax and/or legal adviser for guidance on your particular
situation.
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