New York Estate Planning & Elder Law Blog
Dynasty trusts often conjure up images of very wealthy families that have a great deal of money to pass onto their heirs. However, dynasty trusts can actually be an effective tool for families with more average assets to distribute. Investopedia defines dynasty trusts as long-term trusts established to transfer wealth from generation to generation while avoiding the incurrence of transfer taxes such as the estate tax and the gift tax. Before deciding if a dynasty trust is right for your needs, it is important to understand how they work and whether or not their benefits will meet your individual needs.
The Basics
Basically, dynasty trusts are established so that they can survive for 21 years after the death of the last person for whom the trust was established. Theoretically, this means such trusts could be in existence for more than 100 years. Typically, the original beneficiaries are the children of the person that has established the trust. When those children die, the trust typically begins to benefit the grandchildren and possibly great-grandchildren of the individual that established the trust. This is why they are referred to as dynasty trusts because they can continue to benefit several generations of heirs. Dynasty trusts are irrevocable, which means that the person that establishes such a trust will have no control over the trust or its terms once it is funded. Instead, it will be controlled by a trustee appointed by the person that has established the trust.
Tax Considerations
While a dynasty trust may help you avoid significant tax penalties associated with the estate tax and gift tax, it could be subject to the generation-skipping transfer tax. Typically, this tax will apply to any related beneficiary more than one generation younger than the donor and/or any unrelated individual beneficiary that is more than 37.5 years younger than the donor. In 2017, a lifetime exemption of $5.49 million allows individual beneficiaries to avoid the generation-skipping transfer tax as long as their lifetime inheritance is under that amount. Above the exemption amount, a 40 percent tax on the value of inheritance beyond the exemption will be assessed.
Benefits
While complicated, WealthManagement.com notes that dynasty trusts can provide many benefits for individuals looking to distribute their assets to their extended family without the consequences of many applicable taxes that will apply when other vehicles to transfer wealth are utilized. Instead, a dynasty trust can allow you to deepen your relationship with your extended family – including future generations. You can also use dynasty trusts as a way to carry some of your assets over to multiple generations while utilizing other estate planning tools for more immediate family members. The combination of these various estate planning tools can allow you to effectively avoid many severe tax consequences associated with other ways of wealth distribution. This means you will be able to provide more financial security via distribution of assets in a dynasty trust because less of your money will be required to go to taxes. You can even design dynasty trusts in a way that incentivizes certain behavior from heirs over a longer period of time, which can ultimately help protect your assets and reputation. An experienced estate planning attorney can work with you to determine if a dynasty trust is right for your needs.