Dynasty Trusts – A Planning Tool for the Masses?
When most people hear the term “dynasty trust,” they assume it’s something for only the wealthiest of families. However, dynasty trusts are not as out of reach as you might think, and can be used by many more families of a greater wealth spectrum than currently use them.
Demystifying dynasty trusts
Dynasty trusts keep your wealth within your family for a long time. When properly designed, they can last forever. Dynasty trusts are, however, irrevocable and are therefore perceived by some as inflexible. Since adjustments to this type of trust require a great deal more work than they do for a garden-variety revocable living trust you are probably more familiar with, we need to have an in-depth understanding of your needs and goals to create your family’s dynasty trust.
But for many families, the benefits far outweigh the drawbacks of irrevocability and perceived lack of flexibility. While there are several types of laws affecting these trusts that vary state-to-state, dynasty trusts offer several benefits:
- They consolidate and build intergenerational wealth, allowing you to create long-term security for your family.
- They help avoid estate, gift, and generation-skipping transfer taxes. Although these taxes are unpopular with President Trump and Congressional Republicans, history tells us that tax policy can change after any election. Any comprehensive estate plan must consider this possibility.
- They protect your beneficiaries’ inheritance from creditors and divorce.
- When creatively designed, they can even incentivize desirable behavior from your trust beneficiaries.
How is a dynasty trust different than other types of irrevocable trusts?
Simply put, a dynasty trust is one that is designed to consolidate and build intergenerational wealth over a very long time. Other common types of irrevocable trusts (like GRATs, ILITs, QPRTs, CRTs, etc.) are created to achieve a specific tax result. Dynasty trusts build on these other planning strategies and are appealing because they allow your clients to take a long view of estate planning for their family.
Why is now the time to explore this option with your clients?
In today’s favorable tax and legal environment, dynasty trusts can make more sense than ever – even for a family with $1 million of wealth. Any clients that have significant life insurance policies, a small business, or other assets that might increase in value significantly (like founder’s stock or vacant land in a fast growing area) should have a talk with us about whether a dynasty trust makes sense.
Families haven’t always had such wide opportunities to explore dynasty trusts. Many states have laws against perpetuity designed to prevent trusts from lasting many generations. While these laws still exist in some states, there is a trend toward less rigid application or even outright removal of these rules. One reason for this is that financial institutions stand to benefit from management fees associated with dynasty trusts. However, your clients’ families benefit as well because wealth that’s consolidated and managed (as in the case of a dynasty trust) tends to be more likely to be preserved and successfully pass to the next generation versus wealth that’s divided and distributed (as in the case of many garden-variety estate plans).
A dynasty trust is a win-win for you and for the families you serve.
Planning for International Families
The use of a dynasty trust can be an important planning tool for international families. A typical situation with my clients is one client will be a US citizen and their spouse will be a non-US citizen and not a resident of the United States (“non-US Spouse”).
A non-resident of the US is subject to US (federal) estate tax on US situs assets and they will only have a $60,000 estate exemption. A non-resident of the US is subject to US gift taxation on lifetime transfers of real and tangible personal property located in the US and they do not have a gift tax exemption. It is important to understand the transfer tax rules, income tax rules, and tax reporting requirements in effectively structuring an estate plan for international families with a non-US spouse. There are many planning opportunities, but also many traps for the unwary.
To the extent the non-US Spouse’s assets are outside the US, the assets will avoid US estate and gift tax. Typically non-US Spouse’s will want access to the US financial markets, but will not want their estate to be subject to substantial transfer taxes at the time of their death. There is a similar issue with holding US based real estate.
It is also important to understand how the non-US Spouse is subject to US income tax. For example, the non-US Spouse is generally not subject to capital gains tax on the sale of stock or other assets with the exception of real estate located in the US. Also, a non-US Spouse generally is not subject to US tax on interest income. In designing the estate plan it will be important to incorporate these income tax benefits into the planning.
To preserve the US income tax benefits and to provide a vehicle to effectively transfer the non-US Spouse’s assets, the use of a revocable trust can be utilized by the non-US Spouse during the non-US Spouse’s lifetime. Upon the non-US Spouse’s death, and if proper planning was completed, the assets can be transferred to a dynasty trust and remain outside the beneficiaries’ estate for US estate and gift taxation. For US based stocks, US real property, and other US situs assets to be outside the non-US Spouse’s estate for US estate and gift taxation, one additional planning step is required, which is outside the scope of this article.
Do you have clients who would benefit by implementing a dynasty trust?
Most people think of dynasty trusts as something only the highest net worth families should even consider. In reality, they are something that is a great solution for many families. Although they require the help of a skilled estate planning attorney, who can navigate the complex interplay between state and federal laws, along with the qualified long-term investment advice that you offer, the rewards of asset consolidation, preservation, and growth make them an attractive option for your clients. For you, they also provide an opportunity to build trust and connect with multiple generations of your clients’ family.
Don’t pass up the opportunity to discuss these trusts with your clients. Dynasty trusts provide the perfect structure to build and maintain long-term relationships with families and help them consolidate and build assets from generation to generation. Give us a call today to see how a dynasty trust can help you and your clients.
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