You might have heard that “dynasty trust” is a term used for denoting trusts that last for more than a generation. In reality, this term is used for denoting trusts that are developed to stay for generations. You might be surprised to know that in Florida, a trust of this type can last for nearly 360 years. It means that it can stay for more than 15 generations.
Are You Planning to Transfer Wealth?
Let us consider that you are planning to transfer your wealth to the next generation. When they are in such a situation like you, many families in Florida prefer to make gifts to younger family members. But, as against giving the gifts straight, they think about gifting assets to a trust. The reason is that this move will bring them many benefits. Examples include maintaining family control until the beneficiary reaches adulthood, tax planning, and asset protection, to name a few.
If you are an elderly person thinking about transferring your wealth to your grandchildren, the best thing to do is to rely on a dynasty trust. As this type of trust lasts longer, it can function as a useful estate planning tool for families with multiple generations like yours. When you intend to choose a wealth transfer strategy, it is crucial that you should evaluate how it will be a beneficial move. To help you in this regard, here are the two major benefits you can expect from a dynasty trust:
Benefits of Transferring Wealth to a Dynasty Trust:
Generation-Skipping Transfer Tax Exemption:
Generation-Skipping Transfer Tax is shortly referred to as GST. In the United States, this tax is imposed on the assets transferred to grandchildren. Even the tax is applicable for transferring wealth to remote descendants. This tax will be applicable after excluding the permitted exemption limit. This tax is imposed to make sure that the person transferring wealth cannot avoid tax by skipping a generation. The thing to remember here is that the GST does not exempt you from estate and gift taxes. But, you will have to bear GST apart from these taxes. As per 2019 tax guidelines, a person can give up to $11.4 million worth of assets to a trust. This was the exemption limit applicable. The assets of the trust remain shielded against transfer taxation based on what the state law and trust document permits.
The good news as you plan to transfer the wealth of your family to a dynasty trust is that this trust is exempted from federal GST Tax. This trust can do it for you by getting rid of family wealth from the transfer tax system. The trust can do it as long as it exists and principal and income are used for the benefit of every succeeding generation. Above all, it is possible to transfer the GST exemption by transferring assets that are subject to valuation rebates.
Before getting into the second benefit of dynasty trust, you should understand how dynasty trust Works.
How Does A Dynasty Trust Work?
To establish a dynasty trust, you will have to create an unchangeable trust for the benefit of your children or grandchildren. Even you can do it for the benefit of both. You also have the option to name some of your family members as trustees. These trustees will have the power to distribute either the income or the principal for the reasonable support, best interests, and medical care of the beneficiaries. Also, the beneficiaries can get the power during their lifetimes by a will to appoint some or all the assets of the trust to any one or more of your descendants. In the case of the death of the beneficiary, the rest of the assets, if any, would be disbursed to similar or further dynasty trusts or the descendants of the beneficiary.
During your lifetime, you can structure the trust in such a way that it functions as a grantor trust. You can do this mainly for income tax purposes. When you do this, you can get additional benefits.
What is a Grantor Trust?
It is a trust where the person creating the trust will remain the owner of the property and assets for estate and income tax purposes. When you pay income tax on the income of the trust as a grantor, you can make an additional tax-free gift to the trust. If you choose your dynasty trust to be a non-grantor trust, the trust would pay its own income taxes, and you will not mingle it with your income.
Now, let us get into the second benefit of establishing a dynasty trust:
Grantor Trust Adds One More Layer of Tax Benefit:
In many instances, the grantor trusts treat the creator of the trust as the owner of the assets of the trust for income tax purposes. When you do this, the principle will grow on its own without any income tax to be borne. As mentioned earlier, a grantor trust can add a layer of tax benefit to a dynasty trust.
To be more specific, the estate planning benefits of the asset transfer can be boosted by the grantor. As a grantor, you will bear the income tax as against the trust bearing it. In other words, the assets that belong to the trust are not reduced by income taxes. Further, any income taxes that you pay as a grantor will bring down the size of the overall taxable estate when your estate taxes are calculated.
Is a Dynasty Trust the Right Option for you?
You can implement different strategies when implementing dynasty trust. So, it would be a good idea to discuss your options with a Certified Public Accountant or estate planning attorney. As your Estate Planning & Probate attorney, we can do this for you. We are here to guide you after evaluating your situation personally, as we have the right expertise in estate planning.