Approximately 4,000 estate tax returns are filed annually, according to The Tax Policy Center. When families pass wealth from generation to generation, that wealth is taxed, incurring ongoing losses. To illustrate, when a parent passes assets directly on to their child, those assets are taxed. When the child passes away and leaves those assets to his or her descendants, those assets are taxed yet again, resulting in a cumulative reduction in wealth.
One way that families can avoid this is through dynasty trusts. A dynasty trust is a long-term trust that is created to pass wealth through generations without incurring transfer taxes. If you think a dynasty trust may be the right option for your family, consider reaching out to the experienced estate planning attorneys of Santa Barbara Estate Planning & Elder Law for guidance at (805) 946-1550.
What sets dynasty trusts apart from other estate planning documents is how long they can last. In the past, trusts had a limited duration – for example, a common rule was that a trust could continue to exist for 21 years after the death of the final beneficiary who was alive at the time of the trust’s creation. Now, however, some states, including California, allow for dynasty trusts, which can pass on wealth for many generations to come. In California, a dynasty trust can last for approximately 90 years.
A dynasty trust is an irrevocable trust, meaning the grantor (the person who has created the trust) and his or her beneficiaries does not have any control over the assets and cannot modify the trust’s terms. Grantors establish rules around the assets and the assets are passed from beneficiary to beneficiary – beginning with the grantor’s children, usually, and continuing through grandchildren after the death of all children and then great-grandchildren. The grantor is legally allowed to put up to $11.58 million in the trust without incurring taxes when transferring assets.
There are five essential steps to setting up a dynasty trust. These include:
Planning dynasty trusts is a complex legal process that requires the navigation of federal and state taxes as well as making sure your estate planning is in order. For this reason, it is critical that your first step is considering a visit with an estate planning attorney who can help you decide whether a dynasty trust is right for your family. The experienced attorneys at Santa Barbara Estate Planning & Elder Law may be able to answer questions that you have about dynasty trusts.
There will be different options for who can manage your dynasty trust – typically banks or other financial institutions. It is important to consider carefully what options best meet your goals. Designating beneficiaries is another complicated decision because who you choose impacts how beneficial the tax exemptions would be.
In this scenario, it might make the most sense to include non-income-producing assets or real estate, or even life insurance. Again, here it is important to consider what is most beneficial to include for tax exemptions purposes.
Important considerations here include what kind of control you would like each beneficiary to have – for example, you may stipulate certain conditions for beneficiaries such as they must complete an undergraduate degree to receive their distribution. An estate planning attorney can help you understand all of your legal rights and financial benefits as you move through this process and make these decisions.
Finally, there are two ways to fund the trust – either you can add assets while you are alive or at the time of your passing. Once the assets are added they cannot be removed.
Wealthy taxpayers frequently contribute the highest amount in taxes. For example, Pew Research Center points out that taxpayers earning over $200,000 pay more than half of all federal income taxes, despite being a minority. In some cases, you may wish to minimize the amount of taxes you pay – which is why there are many advantages to dynasty trusts. These include:
However, there can also be disadvantages to dynasty trusts. These can include:
Dynasty trusts can be a great way to avoid incurring estate tax and preserve generational wealth. However, due to their inflexibility, you are essentially guessing what will be good for your descendants years into the future. It is important to weigh these positives and negatives when deciding whether a dynasty trust makes sense for your family.
Working closely with an attorney is often a key component of creating dynasty trusts. These trusts can be very complicated and legally complex, so it is important to consider working with a knowledgeable attorney who understands trusts, taxes, investments, and estate planning.
The attorneys at Santa Barbara Estate Planning & Elder Law are dedicated to protecting what matters most and will work closely with you to determine if a dynasty trust is right for your family. To learn more and set up a consultation, call (805) 946-1550.