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The
Dynasty Trust as a Planning Tool |
The
word "dynasty" usually conjures up images of vast
wealth. But, it may be appropriate for you to establish a dynasty
trust or similar strategies with "ordinary" wealth.
That’s good news because without such estate planning
strategies in place, your gifts to future generations could
be taxed as high as 55% in each generation. And if the gifted
or inherited funds are not lost, given away or spent in the
interim, this tax will continue to be assessed each time the
money passes to the next generation.
Your gifts also affect the future generations’ estate
tax brackets. If any of your heirs have built up — or
will build up — their own wealth, then even a much smaller
amount coming from your estate will ultimately be taxed to your
children at a high rate. For example, if your estate is valued
at $500,000 but your children are already (or are becoming)
independently wealthy, your assets may ultimately be taxed on
their death at a high (perhaps 55%) estate tax rate.
So why not simply make large gifts directly to your grandchildren
and avoid incurring estate tax at your children’s generation?
Because Congress enacted the generation-skipping transfer (GST)
tax to prevent such tax avoidance. The GST tax imposes an additional
tax above and beyond the regular gift or estate tax. But, there
is one significant loop-hole: Each individual is allowed a $1.10
million GST tax exemption, indexed for inflation.
Thus, a married couple can pass down $2.20 million today —
by gift or inheritance or any combination of both — to
grandchildren or younger generations GST-tax free. Important:
According to the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA), the GST tax will continue decreasing until
it (along with the estate tax) is eliminated in 2010. Of course,
unless Congress passes further legislation, these amounts will
return to their pre-EGTRRA levels in 2011.
Get the Most from Your Exemption
Your family can save substantial tax dollars by using the exemption
appropriately. A $100,000 gift today to a grandchild (qualifying
for the GST exemption) may grow substantially with appreciated
compounding over the years by the time an estate tax return
is filed for your children. Not only the original gift but all
the future appreciation will have escaped estate tax.
Although you can pass down your wealth without ever using a
trust — by simply giving or leaving funds by will to your
grand-children — a dynasty trust offers several benefits:
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Control.
A dynasty trust allows someone other than the beneficiary
to maintain control of the funds. Your grandchildren or
great-grandchildren are probably still young. Even if
they are already driving, voting or even working, they
may not be ready to have full control of the funds. You
can determine at what age you feel your heirs will be
ready to handle this new responsibility. |
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Flexibility.
Although a dynasty trust’s purpose is to allow assets
to remain and grow for the benefit of grandchildren and
future generations, life is unpredictable. You may not
want to totally exclude your children, or even your spouse,
from potential use of the trust assets if they should
need them. The trustee may authorize income and principal
payments to them subject to the provisions of the trust. |
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Structure.
To achieve the ultimate in estate planning — no
estate tax for your grandchildren or perhaps even your
great-grandchildren — you will certainly need a
trust. Some states have a "rule against perpetuities"
that limits the number of years a trust may continue before
distributing its assets, but other states have eliminated
this rule of law. |
Think
Outside the Box
A dynasty trust, basically, is any trust designed to remain
in place through multiple generations. You can create such a
trust to take effect either during your lifetime or at your
death. And, you can incorporate dynasty trust provisions into
other trusts, such as credit shelters or irrevocable life insurance.
Therefore, your estate plan (or perhaps your parents’
or grandparents’ estate plans) could benefit from a dynasty
trust. All you need to do is think outside the box — make
it happen. If you would like to learn more or discuss how this
strategy might apply to your family, please call us. Our professionals
would be happy to help you discover the benefits of dynasty
trusts.
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