There are many strategies – or tools – available to the savvy estate planner to help protect and preserve the fruits of a lifetime of accomplishment, and pass them along to future generations. Bloomberg wrote about a specific type of trust known as the Dynasty Trust – a little known strategy that you might have thought was only suitable for the ultra-rich. However, in today’s tax environment, Dynasty Trusts are gaining popularity as a valid strategy for those of more modest means.
Trusts can be powerful tools for overcoming transfer taxes to include the estate tax, the gift tax, and the generation-skipping transfer tax – but there are always limitations. A dynasty trust is used to pass money on to multiple generations of descendants while paying as little in taxes as possible. The trusts have no expiration date and there are no required minimum distributions, meaning their assets may grow for an unlimited number of future generations.
This year represents a pretty good opportunity to set one up too, thanks in no small part to the generous gift tax exemptions. Currently the exemption is set at $5 million, and effectively $10 for married couples, which is a nice hefty amount to begin a trust. Since the trusts last indefinitely and avoid taxes, the money can simply accumulate over the remainder of your lifetime, offering a huge advantage over other transfer methods.
A dynasty trust funded with $10 million from a couple today could be worth as much as $184 million in 50 years, assuming no intergenerational transfer taxes and a 6 percent annual return, and before subtracting any federal income or capital-gains taxes paid on the trust’s investment returns. By comparison, assets not placed in a trust and taxed twice as an estate in that period could be worth $39 million at the end of 50 years, assuming a $1 million exemption and 55 percent top rate.
Because of their unique nature, dynasty trusts can’t be set up in all states (although Virginia is one of the states in which this kind of trust works well.) Most states have restrictions on the life of a trust – so setting one up might mean doing so across state lines. Still, if you are looking to set up this kind of family wealth, or transfer a large family business, then this planning strategy may make sense for you.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: Bloomberg (July 28, 2011) “Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever”