Understanding Dynasty Trusts

Transcription

1 Understanding Dynasty Trusts

2 Understanding Dynasty Trusts DISCUSSION TOPICS What is a Dynasty Trust? How to Set Up a Dynasty Trust What are the Benefits of a Charitable Lead Trust? INVEST Trust Services Dynasty Trusts are longterm trusts created specifically for descendants of multi generations. What is a Dynasty Trust? Dynasty Trusts are long-term trusts created specifically for descendants of multi generations. Dynasty Trusts can last for 100 or more years. The Dynasty Trust, like any other trust, has a trustee that administers it. The trustee can use trust income or principal for the benefit of the Trust s beneficiaries. When a qualified estate planning attorney is drafting your Trust, you need to inform the attorney just how narrow or broad you want the trustee s discretion to be. The beneficiaries of your Dynasty Trust can be classified as living beneficiaries when you set up the Trust and expected future beneficiaries (i.e. great grandchildren) that can enjoy the benefits of the trust long into the future. The Dynasty Trust can allow responsible beneficiaries to have greater access and benefit from the assets in your Trust. Financially irresponsible beneficiaries most likely will be given less access; and the trustee will apply strict conditions (usually referred to as spendthrift clauses ) before the trustee makes distributions to them. These instructions to the trustee will be provided by you in the language of the Trust agreement. By limiting Trust beneficiaries access, such spendthrift clauses can also prevent creditors of a beneficiary from attacking the Trust s assets for the beneficiaries indebtedness, or prevent a beneficiary s divorcing spouse from laying claim to the Trust assets. An attractive benefit that you will receive in establishing a Dynasty Trust lies in the reduction or elimination of federal estate tax liability on your estate and on future beneficiary s estates. In today s tax system, estate and gift taxes are collected every time assets change hands from one generation to the next. Dynasty Trust can avoid those taxes by creating a second estate that could outlive most of your family members and continue providing for future generations. Dynasty Trusts are most often funded using your Federal Estate Tax Credit. Further tax savings occur in the future at the time of deaths of your descendants. Even after the Trust s assets have been accumulating for years, they remain free from Federal Gift and Estate Taxes for the life of the Dynasty Trust.

3 The spendthrift clauses in the Trust for the grandchildren may be worded in such a way that the trustee must first verify that each beneficiary of the Trust be able to support himself or herself on their own before any distribution would be made to them In 1986, Congress attempted to thwart these tax advantage transfers by creating the Generation-Skipping Transfer Tax (GSTT). The GSTT is applied to the Dynasty Trust by assuming that the Trust s beneficiaries own the assets in the Dynasty Trust outright. However, Congress did include a significant exemption in the law. Every person has a GSTT exemption of $1 million ($2 million if married and the Trust is funded by both spouses). That means each person can transfer up to $1 million to a Dynasty Trust, without any GSTT. Dynasty Trusts of $1 million or less offer the same gift and estate tax advantages of similar trusts created before Most often, the grantor of the Trust (the individual who originally creates the Trust) usually wants to establish it for his/her grandchildren. This is why the Dynasty Trust is most often called a Generation- Skipping Trust. The Trust may not provide any benefit to the Grantor s children, and skips over them to provide for their Maintenance, Education, Health and Support (MESH) of the grantor s grandchildren and great grandchildren. Or the Trust may provide instructions to the Trustee to make the grandchildren the preferred beneficiaries. The spendthrift clauses in the Trust for the grandchildren may be worded in such a way that the trustee must first verify that each beneficiary of the Trust be able to support himself or herself on their own before any distribution would be made to them. The Dynasty Trust itself can be created during your lifetime, or a portion of your estate can be used to fund the Dynasty Trust at the time of your death. In order to avoid gift taxes on the transfers during your lifetime, you may elect to use all of part of your Unified Credit Exemption and annual gift tax exemption. Creating a Dynasty Trust while you are alive allows you to maximize your $1 million GSTT exemption. The Dynasty Trust will shelter not only the value of the assets transferred inside of the Trust, but also any appreciation of those assets. This means that by funding the Trust during your lifetime with the $1 million GSTT, if the assets grow in value prior to your death their appreciation is not subject to any further estate taxation. Had you waited to transfer them to the Dynasty Trust at the time of your death, only a portion of them would qualify for the GSTT exemption. Dynasty Trusts should only be funded with certain types of assets. The IRS taxes the income from these Trusts very heavily, sometimes close to 40%. As a result, the assets placed inside the Dynasty Trust should incorporate a tax-advantaged investment management strategy by the Trustee. Non-dividend growth stocks and tax-free municipal bonds are favorable investments for the Trust. Many grantors of Dynasty Trusts choose to use their Trust as an Irrevocable Life Insurance Trust. The contributions you make into the Trust are used to purchase a life insurance contract on your insurable interest. When the grantor dies, the life insurance s death benefit proceeds become the principal of the Trust for many future generations.

4 For instance, a 45-year-old person may be able to purchase a $20 million paid up life insurance policy by contributing $100,000 per year to the Trust for a period of 10 years. While Dynasty Trusts were originally created by a handful of industrialists and wealthy entrepreneurs of the 1900s, they are not necessary estate planning tools for just the wealthy. However, while any one can create a Dynasty Trust, the Trust itself must be established in states that have repealed the rule against perpetuities. This rule provides that all Trusts must have a distribution of the assets of the trust after a specific number of years after the grantor dies or after the last named beneficiary of the trust dies. Establishing a Dynasty Trust in those states that have repealed the rule will allow your Trust to continue from many years in the future. You should check with a qualified estate planning attorney to make sure that your Dynasty Trust is properly set up to avoid the rule and that it is set up in those States that have repealed the rule. INVEST Trust Services can serve as the Trustee of your Dynasty Trust and have it established in Delaware that has repealed the rule. The Trust itself must be established in states that have repealed the rule against perpetuities. How to Set Up a Dynasty Trust Determine the amount of money to use to set up the Trust. Choose a Trustee that can administer the Trust in a State that has repealed the Rule Against Perpetuities. Since the trust can last for a very long time, it is always best to use a corporate trustee. They do not die or move away as is the case with family members. Decide whether to fund the Dynasty Trust upon your death or during your lifetime. Consider the use of life insurance in your Dynasty Trust. Use an experienced estate planning attorney to set up your Trust. Place proper stipulations in the Dynasty Trust that prevents your children, grandchildren and great grandchildren from becoming trust-fund kids and allows the trustee to preserve the Trust s life for future generations through proper spendthrift provisions. Never fund A Dynasty Trust during your lifetime with assets or property that you may need to financially survive. Once they have been placed in the Trust you cannot take them back. The transfer is an irrevocable transfer. Remember, while a Dynasty Trust is a great tool to reduce or eliminate your Federal estate tax liability, there are other ways and means to accomplish the same advantage. Using Marital Deduction Trust and Credit Shelter Trusts can accomplish the same goal; and they can also provide support and benefit for multi-generations of heirs.

5 Benefits of a Dynasty Trust Ability to transfer wealth to future generations without assets becoming subject to the claims of an ex-spouse, creditor or the Internal Revenue Service. Capacity to transfer wealth from one generation to another generation long into the future. INVEST Trust Services offers a complete suite of trust services. INVEST Trust Services is a Trust Representative Office of National Advisors Trust Company, NATC. The Trust Company is one of the largest independent trust companies in the nation. It is governed by the Office of Thrift Supervision, ( OTS ), a bureau of the U.S. Treasury Department. The Trust Company is also a member of the Federal Deposit Insurance Corporation ( FDIC ). By law, the Trust Company segregates all trust account assets from the capital assets of the Trust Company, ensuring they are never subject to potential creditor claims against the Trust Company. The Trust Company has a professional team of experienced trust executives that will serve all of your trust needs. Please contact your Trust Relationship Manager at INVEST Trust Services for more information. This information is general in nature and should not be construed as tax or legal advice. INVEST Trust Services does not provide tax or legal advice. Please consult your tax and/or legal adviser for guidance on your particular situation. Personal Trust Services Revocable Trusts Charitable Trusts Irrevocable Life Insurance Trusts Special Needs Trusts Irrevocable Trust transfers from other Corporate Trustees Marital Deduction Trusts Credit Shelter Trusts Bill Payment Accounts Investment Management accounts Retirement Plan Services IRAs Custodian or Trustee Defined Benefit Plans 401(k) Daily Valuation Platform Defined Contribution Plans Roth 401(k) Distribution processing and 1099R filings Contribution processing INVEST Trust Services is provided by INVEST Financial Corporation (INVEST), member FINRA/SIPC. INVEST is not affiliated with NATC or FiPar. Products offered through INVEST are: Not FDIC or NCUA insured Not Bank or Credit Union Guaranteed May lose value including loss of principal. 11bi

6 INVEST Trust Services Phone: Fax: