Securing Wealth for Multiple Generations with a Dynasty Trust

When planning an estate, it’s common to consider the needs of children and grandchildren. However, for those who wish to extend their legacy beyond two generations, a dynasty trust offers a viable solution.

A dynasty trust not only helps preserve substantial wealth but also offers potential protection from federal gift, estate, and generation-skipping transfer (GST) taxes for future generations. Additionally, it can provide a range of benefits and protections for families over an extended period, potentially indefinitely.

Establishing and Funding a Dynasty Trust

A dynasty trust can be established either during your lifetime as an inter vivos trust (between living persons from one living person to another) or as part of your will as a testamentary trust. By opting for an inter vivos transfer, you can avoid estate tax on any appreciation in value from the time of the transfer until your death. However, it's important to note that with an inter vivos transfer, the assets won't be eligible for a step-up in basis at the time of your death.

Given the focus on protecting appreciated property, consider funding the trust with assets such as securities, real estate, life insurance policies, and business interests. Ensure that you retain sufficient assets in your personal accounts to maintain your lifestyle.

Considering Tax Implications

Historically, dynasty trusts were primarily utilized to minimize transfer taxes between generations. Without a dynasty trust, assets left to adult children are subject to federal estate tax at the time of the initial transfer to the second generation and are taxed again when those assets pass to the grandchildren. While the federal gift and estate tax exemption shields the bulk of assets from tax for most families, the top federal estate tax rate on the excess remains at 40%.

Additionally, the GST tax applies to certain transfers made to grandchildren, discouraging generation-skipping transfers. The GST tax exemption and 40% GST tax rate mirror those of regular gift and estate tax.

With a dynasty trust, assets are taxed once upon their initial transfer to the trust, with no subsequent estate or GST tax on any appreciation in value. This can result in significant tax savings for some families over the duration of their trusts.

However, when the assets are eventually sold, any gain will be taxable. The basis of the assets will be determined at the time of the initial transfer, though the “step-up in basis” rules may help reduce the taxable amount depending on the circumstances.

Acknowledging Nontax Benefits

Beyond tax considerations, there are numerous nontax advantages to establishing a dynasty trust. For instance, you can designate beneficiaries spanning multiple generations, such as your children, grandchildren, great-grandchildren, and so on. You can also impose specific conditions, such as restricting access to funds until a beneficiary graduates from college.

Planning for Your Family’s Future

A dynasty trust enables you to create a legacy that endures long after you’re gone. However, it’s important to understand that a dynasty trust is irrevocable, meaning it cannot be undone if you change your mind. Therefore, if you decide to chart a course for future generations, it is crucial to be steadfast in your convictions. Contact us for professional guidance on setting up a dynasty trust.