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With a properly executed estate plan, your wealth can be enjoyed by your children and even their children. But did you know that by using a dynasty trust you can extend the estate tax benefits for several generations, and perhaps indefinitely? A dynasty trust can protect your wealth from gift, estate, and generation-skipping transfer (GST) taxes and help you leave a lasting legacy.
Dynasty Trust in Action
Transfers that skip a generation — such as gifts or bequests to grandchildren or other individuals two or more generations below you, as well as certain trust distributions — are generally considered to be GSTs and subject to the GST tax (on top of any applicable gift or estate tax). However, you can make GSTs up to the $5.49 million (in 2017) GST exemption free of GST tax.
Your contributions to a dynasty trust will be considered taxable gifts, but you can minimize or avoid gift taxes by applying your lifetime gift tax exemption — also $5.49 million in 2017.
After you fund the trust, the assets can grow and compound indefinitely. The trust makes distributions to your children, grandchildren, and future descendants according to criteria you establish. So long as your beneficiaries don’t gain control over the trust, the undistributed assets will bypass their taxable estates.
Enhancing the Benefits
To increase the benefit to future generations, you can structure the trust as a grantor trust so that you pay any taxes on the trust’s income. The assets will then be free to grow without being eroded by taxes (at least during your lifetime).
Also consider further leveraging your GST tax exemption by funding the dynasty trust with life insurance policies or property that’s expected to appreciate significantly in value. So long as your exemptions cover the value of your contributions, any future growth will be sheltered from GST tax, as well as gift and estate tax.
Is it right for you?
If establishing a lasting legacy is an estate planning goal, a dynasty trust may be the right vehicle for you. Even if an estate and GST tax repeal is passed as part of the GOP’s proposed tax reform legislation, the repeal might be only temporary. So this planning technique could still make sense.
Before you take action, consult with us, because a dynasty trust can be complicated to set up. We’ll also keep you apprised of any legislative news regarding an estate and GST tax repeal. I can be reached at SDitman@BerdonLLP.com or contact to your Berdon advisor.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.