There are many families who want to use their wealth to provide not only for their children, but for future generations as well. One very powerful tool that is available to help them accomplish this is a dynasty trust. When properly structured, a dynasty trust can keep your assets from being included in your estate or those of your descendants', so they can pass tax-free from one generation to another.
How Dynasty Trusts began
In the 1900's, a handful of industrialists and entrepreneurs had amassed tremendous fortunes. Among them were J.D. Rockefeller, who had made his name in oil, Henry Ford, from mass-producing automobiles, and Andrew Carnegie, who made his fortune in steel. In today's dollars, their estates would rival those of Bill Gates and Sam Walton.
As these visionaries grew older, they asked a handful of lawyers the same question: "What can I do to preserve my estate?" They knew that upon their death, their estates would be heavily taxed when passing to their children, and would shrink even further when going to grandchildren.
By using some of the best tax minds in the country, some of these successful families created a separate trust; a legal entity designed to provide substantial assets.
What is a Dynasty Trust?
Basically, a Dynasty Trust is a trust that is designed to hold assets in trust without direct ownership being transferred to any beneficiary. Instead, successive generations may receive distributions from trust assets or assets that remain held in trust, thus allowing for future benefit and growth. For transfer tax purposes, the assets of the trusts are valued at the amount they were worth when the trust was first created as long as they stay in the trust. Generally, any appreciation is exempt from estate taxes.
Along with keeping future asset appreciation undiluted by transfer taxes, creating a Dynasty Trust today or during your lifetime will offer you another advantage: you can benefit from the protections and exemptions that are currently in existence. However, you should keep in mind that, should you wish to create a trust through your will, exemptions and rules may change.
Another benefit to the Dynasty Trust is that, because the trust's assets do not belong to any of the beneficiaries, the assets usually are not subject to claims of creditors or exspouses. Also, if you establish a Dynasty Trust, for example, in the State of Delaware, and you are a resident of another state, the trust generally is not subject to Delaware taxes; although in some cases it could be subject to taxes in your home state.
Dynasty Trusts are available in all fifty states. However, the laws in many states subject these trusts to the "Rule Against Perpetuities," which forces trusts to end roughly 80 to 110 years after they are created. But, at the moment, statutes in 20 states including Arizona, Colorado, Delaware, Florida, Illinois, Missouri, Ohio, Washington, Wisconsin and the District of Columbia have revoked this rule. Individuals throughout the U.S. can establish and maintain trusts in these states that can continue until all the trust's funds have been distributed or until the last living descendant of the creator of the trust dies. However, there are some states that do limit the duration of Dynasty Trusts, with limits ranging from 150 to 1,000 or more years. The individual creating the trust needn't be a resident of one of these states to benefit just as long as the trust has some connection with the state, such as the trustee being located there.
ESTATE AND TAX PLANNING
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