A type of trust used by the wealthy to shelter assets from estate taxes for hundreds of years, or even forever, is under fire.
As budget debates continue to escalate, yet another estate planning tool has come under fire, reports The Wall Street Journal. If you’re interested in a “Dynasty Trust” you may want to act sooner rather than later.
The main objective of a Dynasty Trust is to continue for as long as possible, benefiting several succeeding generations. Usually, beneficiaries are allowed access to income only, so the trust’s principal assets remain intact to provide an income stream for future generations. Dynasty trusts have become increasingly popular since the 1986 tax overhaul and the current version of the “generation-skipping tax.” (GST). The GST imposes a levy that on transfer that skip one generation – such as those from grandparent to grandchild while the grandchild’s parent is still alive. You can avoid the GST, however, if your transfer skips more than one generation.
The Journal uses an example to illustrate:
Robert, a widower, has a net worth of $15 million and his heirs include children, grandchildren and great-grandchildren. If he leaves everything to his children and they in turn leave everything to theirs and so on, there could be an estate tax toll with each generation.
Robert would like to put his entire estate into a trust and skip layers of tax. But if he does, the generation-skipping tax kicks in and replaces the lost taxes—except for an exempted amount, which is currently $5 million per individual or $10 million per married couple. That $5 million can be pumped up using discounts, life insurance and other leveraging techniques.
Dynasty trusts push that generation-skipping tax exemption to the max, putting the exempted amount beyond the reach of estate taxes for the life of the trust. That, in turn, means the heirs don't have to "spend" their own exemptions on those assets.
Dynasty trusts are now allowed in 23 states and the District of Columbia. (You don’t have to live in a state to establish a trust there.)
When the Journal reports that Dynasty Trusts are under attack, they mean that the President’s budget proposal would remove the federal tax exemption after 90 years. So the trust can continue indefinitely, but the tax exemption cannot.
The Journal also suggests that the measure is unlikely to pass this year, but taxpayers should know that the idea is in play. As proposed, the change would apply to new trusts or additions of money to existing ones, but not to those already funded.
Bottom line: if you are considering setting up a Dynasty Trust, now is the time. You can take advantage of the current generous terms of the estate and gift tax – a $5 million individual exemption and top 35% rate, and lock in family wealth that may continue in perpetuity for your heirs.
Trust, GST tax, dynasty trust, estate tax, estate planning, rule against perpetuities