How to Leave a Legacy that Lasts Generations

Many people hope to leave some wealth to help their children and perhaps their grandchildren. Others want to see the wealth benefit even more generations. Instead of leaving it all to one or two generations, they want to spread income and emergency funds beyond the family members who know them.

This goal can be accomplished with a family dynasty trust. In the past, only the very wealthy owners of major businesses used dynasty trusts. The vehicle, however, is available to many families.

In the typical dynasty trust, the parents set up an irrevocable trust. They can transfer to it any assets they own: investments, second homes, real estate, businesses, and even personal property. These days, however, a prime ingredient of a dynasty trust, and sometimes the only asset, is life insurance. The parents transfer cash to the trust, which the trustee uses to buy the insurance. The cheapest life insurance for a married couple is a joint and last survivor, or survivorship, policy that pays benefits only after each of the spouses has passed on.

Life insurance, especially survivorship life, enables a couple to leverage their wealth. The policy should pay benefits that are substantially greater than the premiums paid and than the couple could have left outright to the trust. Someone who wants to leave enough wealth to benefit several generations and that does not have substantial high growth assets such as a business or real estate, should consider life insurance.

The policy benefits eventually are paid to the trust. The trustee invests and manages the money and also uses it to benefit the family members designated in the trust agreement.

Often, income is distributed to family members as they reach certain ages. One option is to have the trust make distributions only from interest or dividends received. A formula used more often these days is for the trust to distribute a fixed percentage of its value each year, regardless of whether it is distributing income, capital gains, or principal. That way, the trustee can invest for growth and still be able to make distributions. In either case, the parents probably want to set the formula so that the trust is likely to earn more than it distributes, allowing the trust value to increase over time.

In addition to paying income, the trust can make loans to family members who need additional money. The loans charge interest and are secured by property of the borrowers. Securing the loans has the effect of protecting the assets from other creditors of the family members. Charging interest allows the trust to benefit current beneficiaries while it grows in value for future beneficiaries.

There are a number of advantages to the dynasty trust in addition to providing wealth for multiple generations. The trust protects the wealth from creditors of one or more family members, as well as mismanagement by family members. It also insulates the wealth from divorces, medical bills, and the like. Plus, assets in the trust are not subject to probate as family members die.

The trust helps family members reduce their reliance on commercial lenders. They can borrow from the trust, and their interest payments increase the family wealth instead of third party lenders. The trust also can buy and rent property to family members or family businesses, protecting them from actions of unrelated landlords.

The dynasty trust also keeps assets from passing outside of the family line. If a family member does not have children, that share of the trust is shifted to other family members.

The original use of dynasty trusts was primarily to protect and perpetuate family businesses. They made headlines recently because of the many media companies controlled by family dynasty trusts.  They still can perform that function, protecting a business from personal creditors of family members and providing family employment for generations.

A dynasty trust usually is limited to about six generations. At that point the trust winds down by distributing its assets to the latest generation or other designated beneficiaries.

There are many ways to fund a dynasty trust. Some people wait to have their estates transfer assets to the trust. Others transfer major assets during life. Still others transfer enough cash each year to pay insurance premiums. In the cases of lifetime transfers, there could be gift taxes, depending on the value of assets transferred and the number of beneficiaries.

The dynasty trust requires professional advice. You need to navigate gift taxes and the generation skipping tax and schedule annual contributions to pay any insurance premiums the trust might have. If your goal is to ensure that extended generations of your family benefit from the wealth, creating a dynasty trust with part of your wealth should be considered.