It was once possible for wealthy individuals to entirely avoid federal estate taxation by placing assets in trust that established life Estates for children in each succeeding generation. This strategy completely circumvented federal estate taxes because the tax code then taxed only property that an individual had right to give away a death period since these trusts gave the children and later generations only the right to and use the inheritance during their own lives , a life estate, but not the right to name who received any part of the untouched trust assets still remaining at their deaths, no estate tax was ever paid.
Congress ultimately closed this incredible loophole by enacting a law that taxed these generation skipping transfers. This tax, known as the generation skipping transfer tax GST, is designed to ensure that transfers of assets from one generation to the next cannot escape a state taxation. This tax is especially onerous as it is set at the highest current tax rate
By assessing a GST tax, the government is attempting to carry out a policy of imposing in a state tax everytime wealth passes from one generation to the next; Otherwise, an opportunity for taxation is lossed. For example, the kind of generation skip which the GST tax is designed to prevent would occur when wealth passes directly from grandparent to grandchild and thereby skips an estate tax it would otherwise have occurred if the transfer had been made to the grandparents own child.
Is there a way to avoid the generation skipping tax?
With good planning, assets may be partially transferred to succeeding generations without triggering the GHST. Although it sought to prevent most generation skipping transfers from occurring, Congress decided to give individuals the right to transfer to future generations a limited amount of property free of the GST. In addition to the estate tax exclusion amount, every individual has an equal generation skipping tax exemption.
It is important to realize that the generation skipping tax is imposed in addition to the estate tax period if a grandparent attempts to transfer more than the GSD exempt amount collectively to the grandchildren, first estate taxes and then GHST taxes will be imposed on the transfer. When the two taxes are combined, most of the estate can be consumed by taxes.
The GSD extension available to you provides a wonderful planning opportunity when used in combination with other estate tax planning techniques. That opportunity is called a dynasty trust.
What is a dynasty trust?
A dynasty trust is a special trust established for those who desire to make full use of an individual’s rights to pass assets to grandchildren or uh descendants and thereby skip a generation without the GHST being imposed. Since the GST exemption applies to all individuals, married couples can shelter two times the gsti exempt amount from GHST taxes period this means that if you are married, you and your spouse can leave twice the GSD exempt amount in a trust for the benefit of succeeding generations in such a way that those assets will never again be subject to a state taxation . The wealth in your dynasty trust would then pass from generation to generation’s state tax free and provide funds to your descendants for their health, support, and education period the limitation that distributions can only be made for health, support, and education is enough to keep the trust assets out of the beneficiaries estate while providing maintenance of the beneficiaries lifestyle.
Can I create a dynasty trust in addition to revocable living trust?
There is no reason why a dynasty trust cannot be incorporated into your individually designed revocable living trust. As is the case with all revocable trust, the planning opportunities are endless. For example, the dynasty trust can provide first for the care of your children and thereafter for your grandchildren and succeeding generations. If you want to prevent the possibility of having the trust assets entirely consumed by your children, you can restrict the use of trust assets by your children to only specific purposes. After the last of your children dies, the remaining trust assets could pass to individual trusts established for each of your grandchildren. This funding pattern could repeat through generations, subject only to the limits of state law on the existence of the trust. Several states have no artificial end to the length of the time trust can exist, and the creation of a trust in one of these states can allow a multi generational trust to last forever.
Apart from providing 4 your children and grandchildren dynasty trusts can also provide them with asset protection from abusive creditors, lawsuits, and even from failed marriages. According to experts like an asset protection attorney, the assets generally cannot be taken by outsiders or in divorce proceedings because they are owned by the trust, not by your child or grandchild.
Additionally, as long as the dynasty trust is not allowed the beneficiary too much access parentheses distributions for a beneficiaries health, education, maintenance and support are acceptable and parentheses, the assets are never regarded by the IRS as being owned by your beneficiaries and are not taxed in their states. This allows a terrific opportunity for the estate tax free growth of the assets not used to take care of the beneficiaries.
To see just how powerful is state tax free compounding of interest can be over an extended period of time, consider the following example of: if trust assets grow annually at only 6%, $1,000,000 grows to over $80,000,000 in the 75 years it would take for it to pass through free generations. During all of that time your descendants would have comfortable access to interest earnings and could even spend all of it if needed parentheses I. E., for a health crisis parentheses. Further, if they bought and retained assets in the name of the trust, they would always have the dual benefits of asset protection and estate free tax growth period
Conversely, assume that your family does not create a dynasty trust and the $1,000,000 simply grows at 6% / 75 years period if each generation is taxed at 55%, after 75 years the money will have grown to be only slightly more than $7,000,000. Using conservative numbers, over a 75 year. The difference between using a dynasty trust and not using a dynasty trust is about $73,000,000!
Are there any other uses of dynasty trusts?
A revocable trust is just one of the estate planning tools available to take advantage of dynasty trust planning period irrevocable life insurance trusts provide another vehicle by which parents can use dynasty trust planning to benefit their children, grandchildren, or both. If done correctly, the generation skipping tax exemption can be applied to the money gifted to the ILIT and used to pay the insurance premiums. In this scenario, the amount of the GST exemption is used up is the amount of the gifts used to pay the life insurance premium and not the insurance is death benefit. For example, if a grandparent gifted $100,000 to an irrevocable life insurance trust established to benefit the grandchildren, the islet trustee could use it to purchase a life insurance policy worth several times to gift . The GHST exemption would then be used to offset the GST taxes due, but the amount of the GHST taxes is based only on the gifted amount of the premiums rather than the higher death benefit! This enables a large amount of life insurance to be purchased tax free aneus tax free by multiple generations. This is just one example of among a number of other opportunities that are available for you to take advantage of with dynasty trust planning.
Whether your state is larger small, a dynasty trust can provide significant estate planning benefits. Do you want your grandchildren’s inheritance, however modest or great, to be protected from abusive predators, lawsuits, or future divorces? Do you want multiple generations of your descendants to receive their inheritance federal estate tax free? If your answer, yes to either of these questions, then you should seriously consider implementing a dynasty trust to protect your family.