Dynasty Trusts: What they are and how they work

There are families who desire to use their wealth to provide not only for their children, but for their grandchildren as well. One powerful tool available to them to accomplish this is a dynasty trust. A dynasty trust, when properly structured, keep your assets from being included in your estate's, or those of your descendants', so they can pass tax-free from one generation to the next.

A short history about dynasty trusts

In the early 1900's, a few industrialists and entrepreneurs had amassed tremendous fortunes. Among them were J.D. Rockefeller (oil), Henry Ford (automobiles) and Andrew Carnegie (steel). As these men grew older, they came to their lawyers asking the same question: "What can I do to preserve my estate?" All of them knew that, upon their death, their estates would be heavily taxed when being passed to their children, and their estates would shrink further when going to grandchildren.

Using some of the best tax minds in the country, these successful families created a separate trust; a legal entity designed to provide substantial assets.

What is a dynasty trust?

A dynasty trust is basically a trust designed to hold assets in trust without direct ownership being transferred to any beneficiary. Instead, successive generations receive distributions from trust assets or assets that remain held in trust, thereby allowing for future benefit and growth. For transfer tax purposes, assets of the trusts are valued at the amount they were worth when the trust was first created as long as they stay in the trust. Generally, any appreciation is exempt from estate taxes.

Along with keeping future asset appreciation undiluted by transfer taxes, creating a dynasty trust today or during your lifetime offers you another great advantage: you can benefit from the protections and exemptions currently in existance. But, you should remember that, if you desire to create a trust through your will, exemptions and rules may change.

Another benefit to the dynasty trust is that, because the trust's assets do not belong to any of the beneficiaries, in most cases the assets are not subject to claims of creditors or ex-spouses. Also, should establish a dynasty trust in the state of Delaware, and you reside in another state, the trust generally is not subject to Delaware taxes. However, in some cases, it could be subject to taxes in your home state.

Dynasty trusts are available in all fifty states. But, the laws in many states subject these trusts to the "Rule Against Perpetuities," which forces trusts to end roughly between 80 - 110 years after they are created. However, presently, there are statutes in 20 states including Arizona, Colorado, Delaware, Florida, Illinois, Missouri, Ohio, Washington, Wisconsin and the District of Columbia that have revoked this rule. Individuals throughout the U.S. can establish and maintain trusts in these states that can continue until all the trust's funds have been distributed or until the last living descendant of the creator of the trust dies. However, there are some states, limiting the duration of dynasty trusts. These limits range from 150 - 1,000 or more years. Whoever creates the trust needn't be a resident of one of these states in order to benefit just as long as the trust has some connection with the state, such as the trustee being located there.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.

 


 

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