Question: What is a dynasty trust?
Answer: A dynasty trust is designed to hold assets in trust for successive generations of family members. Structured so that beneficiaries do not have outright ownership of assets, dynasty trusts avoid estate, gift and other transfer taxes following any tax imposition on the initial funding of the trust. Income generated from trust assets is nevertheless available for trust beneficiaries as is the original corpus or principal contributed to the trust. While some State laws limit the duration of trusts, many states such as Illinois allow trusts to continue in perpetuity. Dynasty trusts can also be structured to avoid the claims of the creditors of the trust beneficiaries.
A typical dynasty trust will provide for discretionary distributions of trust income and principal to the trust beneficiaries. Trust funds are available for the beneficiaries as needed but trustees are encouraged to leave in trust funds which current beneficiaries do not need to make such funds available for future generations without incurring transfer taxes. Because it is not possible to anticipate all of the circumstances that arise after funding a dynasty trust, prudence dictates that the trust instrument is created with as much flexibility as possible to allow the trustee to exercise discretion and thereby account for changing circumstances. The trustee can be authorized to make distributions from the trust for the health, support, maintenance and other needs of the trust beneficiaries. Beneficiaries can also be given rights to redirect the manner in which the trust assets will ultimately pass to their children and/or more remote beneficiaries. These powers of appointment granted to the trust beneficiaries can be as broad or as limited as the trust creator chooses. The distribution discretion afforded the trustee and the powers of appointment given to the trust beneficiaries provide the flexibility needed for a trust which is intended to remain in effect for multiple generations.
The tax savings from the utilization of a dynasty trust can be enormous. Consider a senior family member who dies having fully-utilized his transfer tax exemption during lifetime and owns $1,000,000 of assets at death which is intended to pass to the decedent’s children after estate taxes are paid. Assuming a 40% Federal estate tax rate, the children will inherit $600,000. If the same $600,000 is taxed when the children die and pass assets to their children, the grandchildren will inherit only $360,000 of the original $1,000,000. If the same funds are placed in a dynasty trust upon the original decedent’s death, $600,000 will be held in trust, a generation-skipping trust, for the benefit of the children and future generations with no additional estate tax imposition.
Although the Internal Revenue Code imposes taxes on generation-skipping transfers, the rather generous current generation-skipping tax exemption of $5,430,000 per taxpayer permits a meaningful amount of property to pass into a dynasty trust without incurring a generation-skipping tax. Where a married couple wishes to fund one or more dynasty trusts to the greatest extent possible, the couple can collectively contribute up to $10,860,000 into a dynasty trust, during lifetime or upon death, without incurring generation-skipping taxes.
There are a number of benefits and features which can be built into dynasty trusts. If you have accumulated a sizeable amount of assets, creating a dynasty trust can provide a significant benefit to your family members.
The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want to be answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.
