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Succession & Legacy Planning: Family

DYNASTY TRUSTS
Dynasty trusts are not new. They have been in existence for 600-700 years. Although popular in the past, they have declined in use due to the federal estate tax and the generation-skipping transfer tax. With the recent changes in the estate and generation-skipping tax laws, new increased exemptions, and changes in the rules as to how long a trust may last, they are coming back into favor.

For couples with assets of over $3,000,000, they should be considered. Dynasty trusts do not initially save any taxes. They are designed to provide a continuing, variable annuity for children, grandchildren, great grandchildren, and later generations without any subsequent taxes after husband and wife dies.

What is a Dynasty Trust?
A dynasty trust continues for approximately 100 years—or longer—and provides payments to future generations, without any additional estate or generation-skipping transfer taxes. This is different from the standard estate plan whereby husband and wife usually leave all of their assets outright to their children equally when the surviving parent dies.

This type of trust continues for the couple's children for their lifetimes, with the children receiving payments from the trust. As each child dies, the trust then continues for the deceased child's children (the couple's grandchildren) with payments for the grandchildren during their lifetimes. Depending on a number of factors, the trust may continue for great grandchildren and even future generations beyond great grandchildren.

Why Use a Dynasty Trust?
A dynasty trust provides for a number of things. Since the beneficiary does not own the trust assets and the assets are controlled by a trustee, the assets are not subject to: claims of creditors, division upon divorce, or a child leaving the assets to a second or third spouse, with the assets never passing on to the grandchildren.

The trust beneficiary cannot spend the principal but is limited to the fixed payments and discretionary payments (made only in the trustee's discretion). So there is not a concern that a 50-year-old son will leave the assets to his 26-year-old fourth wife, that a grandchild will use the money to drink, spend and have a good time (spending $500,000 in six months), or that a daughter will convert her inheritance to community property and lose half of it when her husband divorces her. The beneficiary receives a fixed annual sum, like a variable annuity, from the trust monthly. If the beneficiary needs more money for his/her "health, support, maintenance, and education" and does not have funds available for these purposes, the trustee can make additional payments to the beneficiary from principal, in the trustee's sole discretion.

If a person sets up such a trust and then dies, changes in tax laws will not affect the trust and make it taxable. For example, Mary Smith died in 1963 with an estate of $1,000,000, after estate taxes were paid. In those days it was a lot of money. The trust continued for her daughter and then for the daughter's son, after the daughter died. The grandson died in 2001 and the trust had a value of $30,000,000, with annual payments to the grandson of $1,000,000. Since the trust is exempt from both estate taxes and generation-skipping transfer taxes, and the son has a limited power to dispose of the trust assets (which are not taxable), the son left the assets in trust for his wife and children, ultimately going to his grandchildren after his wife and children die. Although there were substantial estate taxes in 1963 the trust has not been and will not be subject to any additional taxes, even though its termination is probably some 60-80 years in the future.

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