California Wills and Trusts

Dynasty Trusts, Day Five

For the past several days I’ve been covering Generation-Skipping Transfer Trusts, which are also known by the name ‘Dynasty Trusts.’  Today’s posting will address how you may take advantage of this technique in your financial planning.

When clients or potential clients first meet with us one of the things they most often ask is how have a lasting impact beyond just their lifetime or even the lifetimes of their children.  If a client speaks with me about their desire to leave a legacy, and if the client has a substantial net worth, I often recommend a Dynasty Trust.

A Dynasty Trust is not so much a Trust as it is a technique that is designed to allow the originator of the trust to pass along their wealth from generation to generation to generation without the added burden of transfer taxes, including estate and gift tax and the generation skipping transfer tax.  The Dynasty Trust allows the Trust’s creator to deliver wealth to future generations of heirs…but the rules regarding distribution and usage of the trust are entirely set forth in the terms fashioned by the trust’s founder.  A Dynasty Trust is not to be entered into lightly and without considerable thought, as the trust is irrevocable and once it is funded even the founder no longer has control of the assets and will not be able to retrieve the assets or amend the terms of that trust.  Think long and hard before entering into this type of trust.  For many, it doesn’t take much thought; they’re clear establishing a Dynasty Trust—and their own familial dynasty—is the only way to go.

It’s important to note that although the Trust’s founder no longer retains control of the assets placed in Trust, the founder may still choose to nominate him or herself as a role-player of some form regarding the Dynasty Trust.  Were the Trust founder to establish their Dynasty Trust for use during their own lifetime—not simply for future use by descendents—then from the perspective of the IRS, the founder would be treated as the Trust’s owner during that time period.  While the Trust’s founder (also known as grantor) is alive, the grantor would be responsible for bearing the income tax burden.  Again, during this period while the founder/grantor is still living, the Trust would be regarded as a Grantor Trust rather than a Dynasty Trust.  The Dynasty Trust would be set up to kick in at the time of the grantor’s death.

So how might this apply to you?  Well, if you chose to create/found/grant a Trust and if you were choose to create a Dynasty Trust for your daughter, you would be able to decide what, if any, rights she’d have to decide who gets to inherit the Trust upon your death.  Perhaps you’d choose to bring your daughter’s husband in for a share of the Trust…perhaps you’d select to do otherwise.  If, for example, your daughter is young or irresponsible you might even choose to create a Dynasty Trust with specific rules and guidelines for what money would go to your daughter when, and under what circumstances.  You might even appoint a third party as a trustee to ensure your daughter holds to your pre-established terms.  By enforcing your rules and guidelines, the appointed trustee would ensure that, along with your Dynasty Trust, your money would continue to provide for your heirs for generations to come.