August 29, 2024 •HoganTaylor
When creating estate plans, individuals often consider their children and grandchildren. However, for those wishing to extend their planning beyond two generations, a dynasty trust offers a powerful solution.
What Is a Dynasty Trust?
A dynasty trust is designed to preserve significant wealth while potentially shielding it from federal gift, estate, and generation-skipping transfer (GST) taxes for multiple generations. This type of trust can provide enduring benefits and protections for families, potentially lasting indefinitely.
Establishing and Funding a Dynasty Trust
A dynasty trust can be established during your lifetime as an inter vivos trust or through your will as a testamentary trust. With an inter vivos trust, any appreciation in value from the time of the transfer until your death avoids estate tax. However, the assets transferred inter vivos will not receive a step-up in basis at your death.
When funding the trust, consider using assets such as securities, real estate, life insurance policies, and business interests. It's crucial to retain sufficient assets in your personal accounts to maintain your lifestyle.
Tax Considerations
Historically, dynasty trusts have been utilized to minimize transfer taxes across generations. Without such a trust, assets passed from one generation to the next are subject to federal estate tax upon transfer, and again when passed to the following generation. Although the federal gift and estate tax exemption shields most assets, the top federal estate tax rate on excess amounts is 40%.
The GST tax also applies to certain transfers made to grandchildren, imposing the same exemption and tax rate as for regular gift and estate tax. A dynasty trust allows assets to be taxed only once upon initial transfer, with no estate or GST tax on subsequent appreciation. This can save substantial tax dollars over the life of the trust.
Upon selling the trust's assets, any gain will be taxable. The basis of the assets is determined at the time of the initial transfer, though the "step-up in basis" rules may mitigate the taxable gain depending on the circumstances.
Nontax Benefits of a Dynasty Trust
Beyond tax advantages, a dynasty trust offers several nontax benefits. You can specify beneficiaries across multiple generations, typically directing assets along a line of descendants, such as children, grandchildren, and great-grandchildren. Additionally, you can impose conditions, such as limiting access to funds until a beneficiary reaches a certain age or achieves a milestone, like graduating from college.
Planning for Your Family's Future
A dynasty trust provides a lasting legacy, continuing your intentions long after you're gone. It's important to note that a dynasty trust is irrevocable, meaning it cannot be undone if your circumstances or intentions change. Therefore, careful consideration and confidence in your decisions are crucial when setting up this type of trust.
For guidance on establishing a dynasty trust and ensuring it aligns with your family's goals, contact us for professional advice.
HoganTaylor Estate Planning Services
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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