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Dynasty Trusts: The Ultimate Family Plan

Preserving family wealth can last forever with proper estate planning.

At one time or another, many of us have heard the term “dynasty trusts” and dismissed the thought, certain that it is the exclusive domain of those with extraordinary wealth, or those wishing to pass assets to grandchildren rather than children.  This could not be further from the truth. Generation-skipping does not refer to skipping your children, it’s about skipping the payment of estate taxes, possibly for hundreds of years!

As a matter of fact, a little bit of knowledge can go a long way, and you might just learn that a dynasty trust might be perfect for your estate planning.  For those who have managed to accumulate sufficient assets for retirement and, in all likelihood, will be leaving some of their wealth to their children, there are some choices:

  • Most people leave their assets outright, or directly, to their heirs, giving them the freedom to do what they want whenever they want with the assets. These people typically believe that leaving assets in trust for their heirs creates restrictions and limits, implying that they could not be trusted.
  • Those who have children with histories of spending too much too soon, have had experiences that create uncertainty (e.g., alcohol or drug issues, criminal activities), or have spouses that they do not trust, believe that leaving the inheritance in trust makes the most sense, as they can create whatever rules or restrictions they see fit.
  • And, of course, many people believe that a combination of the above — part outright and part in trust — makes the most sense.

No matter how much or how little wealth you possess, you should create a plan that fulfills your objectives so that any wealth you pass on to future generations will pass according to your plans.  And, if you could create the ideal estate plan that provides your children, and ultimately future generations of your family, with the gift of financial security, it might have these features:

  • the ability to leave total control and access to your children and future generations;
  • assurance that YOUR assets will ultimately pass to YOUR grandchildren, and so on; and
  • protection from future divorce, bankruptcy, lawsuits, and estate taxes.

 

Does this sound too good to be true?  Well, it’s not. As a matter of fact, as you might have guessed by now, it’s called generation-skipping planning, the technical term for dynasty trusts!

Generation-Skipping Planning in a Nutshell

Without boring you with numbers that inevitably will continue to change over the years, I will stick with the concept.

Rather than leaving your assets directly to your children, they would pass into a separate trust for each child.  If you trust your child, he or she can be their own trustee, and they can have access to income and, in the event of need, principal.  If you do not trust your children to be their own trustee, you could name another person or institution to serve as trustee subject to whatever rules you create.

Importantly, even though your children may have access and control, the inheritance belongs to the trust rather than your children.  And, as long as the assets remain in trust, they are protected from the personal risks of your children, and from future estate taxes.  Upon your child’s death, the trust would be divided into shares for each of your grandchildren.

Tax Laws – Yesterday, Today, and Tomorrow

You may be aware that the estate tax exemption is presently $11.2 million, meaning that anyone who has less than that amount will pay no estate taxes, and that married couples can own up to $22.4 million without being subject to tax.  So, since well over 99% of our population has nowhere near that amount of assets, why should they bother doing any planning?

The answer lies in our history. The estate tax was originally enacted to cover war-related expenses during the 18thand 19thcenturies.  When these conflicts were resolved, the laws were repealed.  The first modern estate tax was enacted in 1916 in response to World War I. Although many changes were made over the years to reflect modern times, in 2001, the law was amended to phase out estate taxes over time, to be completely repealed in 2010.  However, before that law took effect, the estate tax was made permanent in 2011.  Since that date, the limits have expanded until reaching current levels in 2018.

Do you sense a pattern here? Is it possible that limits could be reduced just as quickly as they have expanded?  You betcha!  Smart people continue planning so that they have the best plan in place irrespective of the inevitable changes in future tax laws.

Finding the Best Advisors     

When you are ready and prepared to engage in estate planning, the first step is to hire the right attorney and take an active role in helping him or her craft what will become the foundation of your family’s wealth for generations to come.  This involves a variety of tax and non-tax matters, and it requires a lot of thought.

I cannot underestimate the importance of selecting the right advisors who possess the expertise and communication skills to help you properly craft your estate plan.  The use of generation-skipping planning is a very complex matter and simple mistakes can cost millions of dollars!  I have found that the optimal plans have been created by assembling a team composed of a highly competent attorney, accountant, investment advisor, and insurance professional who, working together with you, can fulfill your stated objectives and desires.

I hope you learned something interesting today.  If you want to learn a bit more about Dynasty Trusts, I could refer you to my book, Understanding Generation-Skipping Trusts, which remains accurate in terms of concept, keeping in mind the numbers are outdated.