Estate planning for many people is mostly about making sure the future generations are taken care of. There are various methods for doing this through an estate plan. One effective option is through utilizing some type of trust-based strategy. If you are looking to not only take care of the next generation but also the generations after that you may want to consider creating a dynasty trust.
What is a dynasty trust?
This type of trust is designed to avoid incurring transfer taxes, such as estate tax, gift tax or generation-skipping transfer tax (GSTT). Your beneficiaries for multiple generations will be able to avoid these types of taxes as long as the assets stay in the trust. If the dynasty trust is properly formed it can last for multiple generations or even forever.
Legal basis for a dynasty trust
In the past trusts were only legally allowed to last for a specific number of years. Many states had laws that regulated when a trust needed to end, usually 21 years following the death of the final beneficiary. This would mean a trust could potentially endure for around 100 years more or less. However, many states have eliminated these rules, allowing trusts to last for multiple generations.
How does a dynasty trust work?
Usually, the grantor of a dynasty trust will name his or her children as the beneficiaries. Following the death of the grantor’s last child, the grandchildren or great grandchildren will be the beneficiaries. The trustee is the entity in charge of administering and managing the assets in the trust in accordance with the rules of the trust documents. Generally, the trustee of a dynasty trust will be a bank or some other type of financial institution.
Irrevocability
A dynasty trust is an irrevocable trust which means that the grantor will lose control of the assets once these assets are entered into the trust. However, the grantor, when creating the dynasty trust, will design strict rules which determine how the trustee is to manage and administer the trust assets.
On the other hand, you should know that, as a grantor, you will not be able to amend these
rules once the trust is in place. This also applies to future beneficiaries of the trust who will have no power to alter the terms of the dynasty trust.
Therefore, make sure to consult with a financial professional to make sure you understand the implications of your trust strategy.
Tax implications
Trust assets will only be liable for gift tax and GSTT taxes upon transferring of assets above the value of current federal tax exemptions. In accordance with the Tax Cuts and Jobs Act of 2017, the federal tax exemption for 2022 is $12.06 million. The exemption amount is adjusted to
inflation each year. Also, lawmakers may on occasion make changes to the exemption,
therefore it is a good idea to keep up-to-date with the latest changes in the relevant law.
Integrating a dynasty trust into an estate plan
Deciding on a dynasty trust is just one part of a comprehensive estate plan. There are many other factors to consider when forming your estate planning strategy. Budgeting, life insurance and various other items should be customized to fit your specific circumstances and objectives.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Rademacher Financial, Inc. and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
