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Estate Planning
Dynasty Trusts
Families who want to preserve their wealth for future generations face many challenges. High income taxes reduce the annual return generated by their assets, while gift, estate and other transfer taxes take their toll on the assets as they pass to each successive generation. In addition, family assets can be threatened by beneficiaries, creditors, divorce and/or bad judgment.
Even with the tax consequences and threats from creditors referred to above, many individuals still institute family trusts of some sort to try and maintain their family's wealth. Nevertheless, taxpayers face yet another hurdle; the length of time a trust may remain in existence. Under the majority of states' laws, a trust may generally terminate between 80 and 100 years after its inception - based on a principle of law called the "rule against perpetuities." Utah is one of these states with such limitations.
South Dakota and Delaware are among the states that do not have a time restriction and also can provide various tax benefits. Trusts meeting certain criteria and requirements based on these states' laws can take advantage of these benefits. More specifically, residents as well as nonresidents of these states can create a type of trust called a Dynasty Trust that, if drafted properly, can theoretically last forever and preserve family wealth for future generations in a highly tax advantaged manner.
Trust Funding. A dynasty trust can be funded in various ways. For example, a grantor can transfer closely held stock, partnership interests, real estate and other business interests into the trust, often with significant tax advantages as well. Most commonly however, the purchasing of life insurance within the Dynasty Trust is the most powerful strategy that can be used to leverage the value of a trust. For example, a second to die life insurance policy will pay a benefit tax free to the trust upon the death of the second spouse and increase the amount of assets available to succeeding generations.
Avoiding Situations Where Children Are Dependent on a Trust. The greatest concern for creators of Dynasty Trusts is the worry that future generations and family members may become dependent upon the trust and, in effect, it may "ruin" children's ability to manage their money and ability to mature. Although this can be a serious concern, various trust provisions can be drafted into a Dynasty Trust that can actually train children to better manage money and maturely handle their finances.
Provisions that are oftentimes implemented include the following:
- Until a certain age is reached, trust income is only distributed for education or church service.
- After a certain age, trust income is distributed in a ratio based on the earned income of the recipient.
- Allow for trust distributions to a future granddaughter if she stays home to raise children rather than follow career.
- Distribute income to a grandchild if they choose a career or occupation that is of a charitable or humanitarian nature.
- Give rewards for obtaining certain educational degrees.
- Avoid distributing funds for recreational or luxury items.
The Ultimate Benefit. The real benefit of a Dynasty Trust is that the structure allows grantor to control, affect and influence future familial generations. How many of us can state that we know the life history of a grandparent or great grandparent. We would suspect very few of us. However, how many of us would be familiar with the life history of a great grandparent if he or she had created a trust for our education and had tried to influence our lives in a positive manner. We would argue that many of us would be very interested in the life history, personality and character of such a grandparent. In sum, we believe a dynasty trust can strengthen familial ties and allow our posterity to step on our shoulders and to succeed in even greater ways than we have ourselves.
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