New York Estate Planning & Elder Law Blog
A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client’s death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.
However, today’s rules for trusts and estate tax exemptions are different. A deceased spouse’s portion of the estate tax exemption passes automatically to their surviving spouse. Additionally, the tax exemption level has risen from $1 million to $5.3 million per person. As a result, a lot less people need to worry about a part of their estate being taxed upon their death, and dynasty trusts have mostly fallen out of use.
Benefits of Dynasty Trusts
The estate tax exemption is not the only benefit to dynasty trusts, and estate planning attorneys can utilize them in a variety of ways to ensure that a client’s family is taken care of for years. The most basic reason for a dynasty trust is asset protection. When a client dies if their children lose a lawsuit the trust cannot be forced to pay. A dynasty trust also prevents a surviving spouse from remarrying and disinheriting the beneficiaries of the trust.
A dynasty trust also provides the option to set up the trust in perpetuity. Most trusts designate that distributions should be made to beneficiaries when they are 18, 25, or 30. However, by having a dynasty trust the young beneficiary does not have the opportunity to squander all of their money at a young age. By using a dynasty trust a young beneficiary can have ownership of the money, but not necessarily access to it. A trust can be put in place for over one hundred years, and the trustee decides when and how distributions should be made.
Finally, dynasty trusts protect against legal loopholes and changing laws. For example, usually when a surviving spouse remarries she will forfeit the tax exemption on the deceased spouse’s estate. A dynasty trust prevents that from occurring. This type of trust also locks in the exemption level at the time of the creation of the trust. So if the level of exemption falls back to $1 million, the dynasty trust created now will keep its exemption of $5.3 million.
Detriments of Dynasty Trusts
However, there are some drawbacks to creating a dynasty trust. Setting up a dynasty trust is a complex legal process that requires a significant amount of time and money to accomplish. If a client wants to set up a dynasty trust in perpetuity, advisers need time to discuss who the trustees will be, what money and assets will be used, and under what circumstances the terms of the trust can be altered. Dynasty trusts can be written in a way that seems like a hand is controlling from the grave or can be done with a great deal of flexibility in the terms.