Dynasty Trusts: Leaving a Lasting Legacy for Loved Ones

Dynasty Trusts: Leaving a Lasting Legacy for Loved Ones

Nothing is certain in life except death and taxes. However, strategic estate planning can dramatically decrease any taxes due at the time of your death. Historically, wealthy individuals and families have used dynasty trusts to protect and preserve their fortune through multiple generations. Dynasty trusts are designed to hold assets for many generations, and thereby, minimizing the payment of federal estate, gift, and generation skipping transfer (GST) taxes when the assets are passed from generation to generation.

A dynasty trust is a long-term trust designed to pass wealth from one generation to another without incurring transfer taxes. The dynasty trust’s essential characteristic is its term. The dynasty trust is created to last in perpetuity. In the past, however, the archaic “rule against perpetuities” made it impossible for a trust to potentially last forever. The rule against perpetuities directed that a trust must terminate and distribute assets within 21 years after the death of the last surviving beneficiary who was alive when the trust was created.

In 2000, Florida changed its rule against perpetuities to extend the period of time in which a trust must terminate to 360 years. In other words, under Florida law, a grantor may create a trust for the benefit of another that will terminate 360 years following the death of the beneficiary. This makes Florida an attractive state in which to create a dynasty trust.

The dynasty trust is typically created for the benefit of the grantor’s children and descendants, including descendants not yet born. It is advisable to designate a corporate trustee as the trustee of a dynasty trust to ensure continuity and consistency in managing the multi-generational trust in accordance with the trust’s provisions. The terms of the dynasty trust should direct the trustee to hold as much of the assets in trust for as long as possible. The beneficiaries may have limited access to the trust property but they mostly should not receive it outright. By holding the assets in trust, the assets are safe from taxes, creditors, spendthrift beneficiaries, and divorcing spouses.

The magic of the dynasty trust exists in the ability to leverage federal tax exemptions so that assets are subject to transfer tax only once. Absent this type of planning, estate and gift taxes hit every generational level. The GST tax also hits transfers to any person who is two or more generations below the grantor, such as grandchildren or great-grandchildren. Over the course of several generations, these tax hits may threaten the economic opportunity and financial security a grantor wishes to create for his or her family.

The federal estate tax is presently at a rate of 40%. Under the Tax Cuts and Jobs Act, the federal estate, gift, and GST tax exemption doubled from $5 million to $10 million per individual, with additional inflation adjustments.[1] As of January 1, 2019, the estate, gift, and GST exemption is $11.4 million for individuals and $22.8 million for couples. These exemptions are indexed for inflation. A grantor wishing to create a dynasty trust will fund the trust at death or through a gift during life of up to $11.4 million (or $22.8 million, if married), tax free. In addition to being tax free, since the GST tax exemption is also $11.4 million (or $22.8 million, if married), the trust itself, and its appreciation, is forever free of GST tax. With a dynasty trust, a family can pass along at least $22.8 million to its heirs leaving a lasting legacy.

Dynasty trusts are a sharp tool to protect and preserve wealth in the family for multiple generations. You may be able to transfer tax-free assets to multiple generations by utilizing the tax exemptions and a dynasty trust. If you wish to discuss this estate planning tool in greater detail, please contact MacLean & Ema to speak with an attorney.

 

 

 

 

[1] The Tax Cuts and Jobs Act is scheduled to expire on December 31, 2025, at which time the federal estate, gift and GST tax exemption would revert to the prior $5 million amounts, plus the relevant inflation adjustments.