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Is a Perpetual Trust for You?

Last update on: Jun 23 2020
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Recent laws are making it easier to use dynasty trusts to make wealth last for multiple generations.

Not too long ago creating a dynasty trust that lasted for generations was difficult. Those of us who took Estate & Trusts in law school tried to learn the intricacies of something called the Law Against Perpetuities, complex rules that limited the life of a trust to 100 years or so.

Now, at least 20 states have repealed the Law Against Perpetuities. Some states put a specific limit on trust life, such as 360 years in Florida. Others allow a trust to last forever.

Now that perpetual trusts are available, some of you should consider using them to build your legacy.

Preserving a business or real estate operation is one reason to consider using a dynasty trust. You might want the financial benefits of the business to stay in the family without taking the risk that business decisions will be made by inexperienced or unwise progeny. The trust can provide for the appointment of successor trustees over the years who are capable of making sound business decisions and determine the amount of distributions from the trust.

Estate taxes are another reason for a dynasty trust. The estate tax might be on its way out (or it might not be), but there is no guarantee that a future Congress won’t re-enact it. Creating a dynasty trust should avoid any estate taxes on future generations. It also can avoid state inheritance taxes, depending on the appropriate state’s law.

A dynasty trust also protects the wealth from claims of creditors of family members. The trust will be unaffected by bankruptcies, divorces, substance abuse, and other problems of the future generations.

A dynasty trust also protects wealth from the general mismanagement and profligacy of heirs. If your concern is only providing for the next generation, there is no need to consider a perpetual trust. If you want to ensure the wealth will benefit the grandchildren and beyond, a dynasty trust should be considered.

You don’t need to be a business owner to create a dynasty trust. Perpetuating any significant amount of wealth is a good reason to use a dynasty trust. The trust can be funded with an investment portfolio, real estate, or other assets.

A dynasty trust also can be created with an insurance benefit. You can set up and fund a trust that purchases a policy on your life. Once the insurance benefits are received, the trustee invests them and makes distributions according to the trust agreement.

A dynasty trust also can be used to protect special assets. Suppose you have a vacation home or other property that you want to remain in the family for generations. You know from observation that too often such properties are sold after a generation or two. Some family members do not use the property much and prefer to have the cash equivalent of their share. If the other family members cannot afford to buy them out, the property must be sold.

By putting the property in a trust, you avoid this dilemma. But family members still have to put cash in the trust to maintain the property and pay property taxes.

Some people even are using dynasty trusts to start businesses. For this to work, someone other than the person who will run the business has to make the initial contribution. This could be a relative or trusted friend. Then, you are named trustee and operate the business through the trust. The trust should protect the business from divorce, bankruptcy, and other adverse events in the lives of you and your heirs.

You and your family do not have to live in a state with a perpetual trust law in order to benefit from it. The trust is covered by the law if the trustee is located in the state. This is an easy requirement to meet since most major banks and trust companies have established offices in states with perpetual trust laws.

Some of the states couple a perpetual trust law with a tax exemption for any trust created by a nonresident. That makes these states doubly attractive for dynasty trusts and also makes it easier for a trust to last multiple generations.

Of course, a dynasty trust is not for everyone.

The trust will have to pay annual fees to the trustee, which can range from 0.4% to 1.30%, or even higher. There also are lawyer’s and other set up fees, which usually begin at $2,000. Most estate planners believe that a dynasty trust makes sense only for sums of $10 million or more.

There also is the intangible factor of locking up the money for generations without knowing who will manage it or spend the proceeds. A dynasty trust is irrevocable, and its terms generally cannot be changed. Also, unless you have a time limit in the trust or another way for it to terminate, the property is locked in the trust where the family cannot tap it.

For most people, supporting the grandchildren through Roth IRAs and other simple methods I have outlined is appropriate. But people with a lot of money or special assets that they want to be the foundation of an extended family legacy should consider the new dynasty trusts.

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