Dynasty Trusts: is this a trust for you, your children and your great-great-great grandchildren?
For whatever reason I have had a bunch of clients ask me about dynasty trusts this week. So, I thought that might be “a sign” that I should write an article about it. I suppose a good place to start is by defining what a dynasty trust is and what it does.
A dynasty trust is a long-term irrevocable trust created to pass wealth from generation to generation without incurring transfer taxes such as the gift tax, estate tax and generation-skipping transfer tax so long as assets remain in the trust. The defining characteristic is the duration of the trust and can be drafted to last for multiple generations, so long it does not violate the Rule of Perpetuities, if this rule exists in your jurisdiction. Thank you, Suffolk Law- Wills and Trusts. On to what a dynasty trust does. A dynasty trust mitigates the impact transfer taxes, helps shield your wealth from creditors and money grubbing soon-to-be ex-spouses and the bad choices of your future beneficiaries. It also helps ensure your assets are invested for the benefit of your children, grandchildren and future generations. This all sounds great, right? What are the downsides, you ask? The first potential downside is you have to choose the rights assets to place in a dynasty trust, such as life insurance, tax-exempt bonds, real estate or an asset that offers high potential appreciation and little to no transfer tax. Since income created within a dynasty trust is taxed more heavily it makes sense to place assets into the trust that are non-income generating. In addition, the trust is irrevocable, so once you (the grantor) places the assets into the dynasty trust there is no turning back or changing your mind as the grantor does not have the right to revoke or even to amend the trust. That is a biggie. Also, the trustee should be a professional trustee as they are usually given some discretionary powers to distribute income and/or principal to the beneficiaries and using a pro allows there to be consistency in the administration of the trust, especially as this trust is supposed to be for the long haul. Moreover, the trustee must follow strict rules to qualify for the annual exclusionary gifts for any dynasty trust that contains life insurance. If trustee fails in his/her duties of properly sending out a Crummey Letter the result could be expensive. Finally, the question I ask is whether it is your intention to shackle your children so that you could preserve wealth for your future great-great-great grandchildren? Maybe you just are thinking about your children or even grandchildren. Of course, dynasty trusts have a time and place and just the right grantor, but the question remains is whether this trust is right for you.
If you have any questions regarding estate planning issues, please contact Anna M. Petronzio. firstname.lastname@example.org, 216-381-3400.