How To Set Up a “Dynasty Trust” for Your Estate Plan

Dynasty trusts have been a mainstay of estate planning for a long time.

They are a standard way to ensure family wealth is preserved and grows through several generations.

Avoiding taxes has been a strong incentive to create a dynasty trust since the beginning of estate and inheritance taxes.

Given that background, it would be logical for dynasty trusts to decline in use now that fewer estates are subject to the estate tax.

In fact, dynasty trusts still are useful to many families.

With few families needing to worry about the estate tax, more families can emphasize the non-tax goals of estate planning.

These goals include wealth preservation, creditor protection, multi-generation investment management, and value-based distributions.

The dynasty trust is the ideal vehicle to achieve many of these goals.

A dynasty trust is very flexible.

Its terms can be set to meet the goals of an individual estate owner.

The trick these days is to shift gears from emphasizing tax savings to considering broader goals for the family and the wealth.

The trust can be set up during the creator’s lifetime or in the will.

Most often it is started while the creator is living.

With the high lifetime estate and gift tax exemption, a large tax-free dynasty trust can be started early.

A married couple can jointly start one using their lifetime exemptions.

The high limit on the generation-skipping tax also makes dynasty trusts more feasible and useful.

Before the 2001 tax law began increasing the exemption, dynasty trusts of any value generally could be created only with life insurance or with property that was not worth much at the time but seemed likely to appreciate.

Now, with the higher exemption, other assets can be used to fund a dynasty trust.

Those with very valuable estates can increase the tax-free funding of the trusts during their lifetime with sophisticated tax-slashing strategies such as intentionally defective trusts, installment sales, shifting economic opportunities to the trust, and other shrewd moves.

Typically just one trust is created during the creator’s lifetime.

After that, the trust often is split into different trusts for each child of the family.

Other options are to maintain one trust with subtrusts for accounting purposes.

After a child dies, that trust or subtrust often is split into separate trusts or subtrusts for each of his or her children.

Or there can be one trust all family members share.

As I said, the dynasty trust is very flexible.

When you work with an estate planner who is experienced with the trusts, you can find the structure that best meets your needs.

When created, the trust is irrevocable, which produces the estate and gift tax savings.

Many states also allow the trust to be written in a way that the wealth is protected from creditors of the creator and of the children.

The amount of wealth that can be added to the trust after the creator’s death depends on the size of the estate and the tax law in effect at the time.

Your will should have several contingency clauses, so that additional wealth will be added only if the tax cost is reasonable.

Whatever happens with the tax law, once the trust is created during your lifetime it stands as a pool of assets exempt from further estate and gift taxes.

In next week’s edition of Retirement Watch Weekly, I’ll continue this discussion by telling you the next steps after the trust is created.

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