The Trust Lawyers Blog

How to Spread Wealth Over Generations & Never Pay Tax With Dynasty Trusts

Posted by Dave DePinto on Tue, Mar 27, 2012

dynasty trustIf you have a large amount of wealth and are planning for the future of your estate, you probably want to ensure that the largest possible amount can pass to your descendants. Unfortunately, estate taxes can be punishingly high. Currently the top estate tax tier is 35%, and unless Congress acts soon, in 2013 that will rise to 55%. That's potentially over half of your wealth gone, before your family sees it. For those interested in avoiding this fate, dynasty trusts are a possible answer.

A dynasty trust is a form of irrevocable trust where the grantor (that's you and possibly your spouse) transfers a large portion of wealth into a trust, to be overseen by a trustee. Under current 2012 rules, you and your spouse can both contribute up to $5 million dollars each tax-free. There are further, more complex methods of transferring additional assets at substantially reduced tax rates that your financial adviser may be able to help you consider. The funds can be transferred either while you are alive or upon your death, although for long-term growth, the former option is better.

Once the trust is established, it can continue to invest its assets and grow in perpetuity, allowing future generations to benefit from it, even ones not yet born. As the grantor, you can set up detailed rules on who is allowed to benefit from it, and under what circumstances. You could, for example, mandate that future generations are not allowed access to it until after they graduate college, to prevent them from becoming “trust fund kids.”

Furthermore, imposing these sorts of spendthrift restrictions will also protect the trust from the beneficiaries' creditors or divorcing spouses. Properly established, a beneficiary cannot give up his claim in the dynasty trust either voluntarily or involuntarily. This makes dynasty trusts a reliable source of income for your descendants for decades and generations to come.

Perpetual trusts are not legal in all states, but several, such as Delaware or Nevada, merely require that the trustee have a presence there, but not the grantor or beneficiaries. Plus, there are few drawbacks, aside from the inevitable dilution of benefits that occurs as the generations pass. With an established corporation as trustee, a dynasty trust could last as long as your legacy.

If you are interested in dynasty trusts, now is definitely the time to act. Besides the real possibility of 2010's tax cuts expiring soon, President Obama's new budget is attempting to end dynasty trusts after 90 years. Trusts established today, however, would still be shielded from those rule changes. If you believe this could be an asset in your estate planning, contact a qualified financial adviser sooner rather than later.

Tags: Dynasty Trusts, Asset Protection, Minimize Taxes