When you’re looking to pass your wealth along to family and loved ones after your passing, a Trust is a commonly used tool to make sure your family and loved ones are protected. Dynasty Trusts take this a step further, offering benefits beyond a standard Trust and allowing the grantor to pass wealth across multiple generations when structured properly.
Here, we review the details and some commonly asked questions we get about Dynasty Trusts, and whether they may be a good fit for you.
What Is a Dynasty Trust?
A “Dynasty Trust” is an Irrevocable Trust that allows you to pass wealth to successive generations of descendants with the distributions and operation of the Trust being controlled by the terms initially established by the Grantor of the Trust.
It is designed to allow the creator to pass wealth from generation to generation without the burden of transfer taxes, including estate and gift tax, and the GSTT (generation skipping transfer tax).
These Trusts can have great benefits, including the accumulation of assets inside the Trust without the direct transfer of assets to any beneficiaries, which excludes the assets from the client’s taxable Estate and potentially doing the same for the beneficiaries’ taxable Estates.
How Do Dynasty Trusts Work?
To establish a Dynasty Trust, the client creates an irrevocable Trust for beneficiaries such as children or grandchildren. They would also name one, or multiple, Trustee(s) who would be empowered to distribute income and/or principal for the beneficiaries’ support, medical care, and best interests.
The beneficiaries can be given the power during their lifetimes, or in their Estate Planning documents, to appoint some or all of the Trust’s assets to any one or more of their descendants. At the beneficiaries’ death, the remaining assets, if any, would be distributed to further, similar Dynasty Trusts, for their descendants.
As with all Irrevocable Trusts, once it is funded, the grantor no longer has control of the assets and will not be able to reach the assets or amend the terms of the Trust.
Grantors, however, have great flexibility with designing Dynasty Trusts, which can be structured to provide long-term financial incentives to help beneficiaries accomplish certain things before they have control of the assets, including such undertakings as:
- Involvement in philanthropy
- College or postgraduate education
- Providing a down payment on a house
Tax Considerations with Dynasty Trusts
Although there are tax benefits to Dynasty Trusts, the gift tax system still applies to them, and you should consider limiting lifetime transfers to the amounts covered under the lifetime credit against gift tax ($11.7 million in 2021) and the annual exclusion amount ($15,000 per participant, per year, in 2021).
Gift Taxes
Any gift taxes paid on the transfer of assets to a Dynasty Trust are deducted from the decedent’s estate, reducing the Estate (and therefore, the taxes paid).
Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GSTT) is a tax on lifetime and Estate transfers to someone at least 37 1/2 years younger than the donor, with the intent of taxing transfers to someone more than one generation below the donor. Before this tax was introduced in 1976, wealthy individuals were able to gift money and property to their grandchildren, while avoiding federal Estate taxes.
If a client applies their lifetime GSTT exemption to transfer assets to a Dynasty Trust, though, they get the benefit of distributing income and principal that accumulate inside the Trust free of the GSTT for the duration of the Trust.
Contact Our Estate Planning Team
Dynasty Trusts have their place in Estate Planning, but they aren’t for everyone and have some other pros and cons that make it critical to talk to an Estate Planning attorney about your specific situation. The team at McCollum Law is here to help. Contact us today to schedule a consultation about your Estate Plan!
www.mccollumlawpc.com or 919-861-4120