What is a Dynasty Trust?
What is a dynasty trust? A dynasty trust is a special kind of trust (Irrevocable trust: Irrevocable Life Insurance Trust (ILIT)) that allows you to pass wealth to your descendants. One can consider it as a “perpetual trust” but many states have now limited the time frame. In California its around 90 years. Also, because it’s a generational-skipping trust, it avoids some repetitive taxation. Hess-Verdon recommends speaking to an estate planning attorney to review tax changes applicable to a dynasty trust.
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Legacy Trust vs. Dynasty Trust
A legacy trust vs. a dynasty trust mean the same thing. It’s an irrevocable trust that allows wealthy families to keep their money in the family for many generations skipping transfer taxes, such as gift tax, estate tax or generation-skipping transfer tax (GSTT) for as long as assets remain in the trust.
What are some Dynasty trust pros and cons?
Dynasty Trust Pros and Cons:
- Why? It allows the successor-trustee to have more autonomy on how to manage the trust.
- The trustee can charge for trustee fees
- Give a wide latitude of discretion for the successor-trustee in a way that beneficiaries believe in unfair.
- Drafting a dynasty trust is very important. Failure to do so could result in the adverse tax treatment of trust proceeds.
- States are now limiting the life of the trust.
- The trust must be irrevocable. Once assets are placed in a dynasty trust, the grantor does not have the right to revoke or amend the trust.
How to set up a Dynasty Trust?
- Consult with an attorney that has experience setting up advanced planning tools like Dynasty Trusts.
- Name your Trustees and Beneficiaries
- Decide which assets to include
- Determine how funds will be distributed
- Fund your trust
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What is an ILIT?
An ILIT is an irrevocable trust that owns life insurance. The grantor funds the insurance through annual contributions. The difference between a dynasty trust vs any other ILIT is that a dynasty trust uses the grantor’s generation-skipping transfer tax (GSTT) exemption to continue the trust for generations. The generation-skipping transfer tax (GSTT) is a flat tax imposed on all transfers that skip a generation.
Trust Administration Attorney
When it comes to advanced estate planning like a dynasty trust, it is advisable to work with a Trust Administration Attorney. The reason behind this is because a Trust Administration Attorney will have had many opportunities to see what estate plan works and what Trust plan may not be sufficient for your situation.
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What to know about Dynasty Trusts
Affluent individuals who desire to safeguard their estate wealth and also create a lasting legacy for loved ones have many strategic and tactical estate and tax planning decisions to make. While considering a dynasty trust, consider how gift taxes, estate taxes and generation skipping transfer taxes can dramatically influence the amount of inheritance left to your children, grandchildren, and great grandchildren.
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