Monmouth's Ask The Doctor Jan-Feb 2019

WHAT IS A DYNASTY TRUST? By Lauren Kolacki A Dynasty Trust is a trust that lasts for a long period of time, often multiple generations. Clients can achieve great economic benefits through the use of Dynasty Trusts. These benefits can include the accumulation of money inside the trust without the direct transfer of assets to any beneficia- ries, excluding the assets from the clients’ taxable estate and potentially excluding the assets from the beneficiaries’ tax- able estates. Dynasty Trusts can also provide strong asset protection for future generations. Grantors have great flexibility with Dynasty Trusts in structuring long-term non-financial in- centives to help beneficiaries learn more about handling and investing money before they have control of inherited assets, motivate beneficiaries to become involved with philanthro- py, to encourage the beneficiaries to go to college or make a down payment on a home for a beneficiary. To establish a Dynasty Trust, the client creates an irrevo- cable trust for the benefit of one or more beneficiaries such as children or grandchildren. The client can name the trust- ee(s). The trustee would be empowered to distribute income and/or principal for the beneficiaries’ reasonable support, medical care and/or best interests (a very broad standard). The beneficiaries can be given the power during their life- times and/or by will to appoint (give) some or all of the trust’s assets to any one or more the client’s descendants. At the beneficiaries’ death, the remaining assets, if any, would be distributed to further, similar dynasty trusts, for his or her descendants. During the client’s lifetime, the trust can be structured so that it is considered a grantor trust for income tax purpos- es. This provides additional benefits because by paying the income tax on the trust’s income, the grantor is effectively making an additional tax-free gift to the trust. A Dynasty Trust can also be structured as a non-grantor trust so that the trust would pay its own income taxes. The gift tax system applies to transfers to Dynasty Trusts. Therefore, when considering the lifetime funding of a Dy- nasty Trust, consider limiting lifetime transfers to the amounts covered under the lifetime credit against gift tax and the annual exclusion amount ($15,000 per participant, per year in 2018). Any gift taxes paid on the transfer of as- sets to a Dynasty Trust are deducted from the client’s estate, reducing the estate (and thus the taxes paid) at the client’s death. Also consider the generation-skipping transfer tax (“GST tax”) when creating a Dynasty Trust. The GST tax is a tax on lifetime and testamentary transfers to persons more than one generation below the transferor, at the highest marginal estate tax rate. If a client applies his or her lifetime GST exemption to transfer assets to a Dynasty Trust, the in- come and principal that accumulate inside the trust may be distributed free of the GST tax for the duration of the trust. Please remember that when setting up a Dynasty Trust, you must speak to a well-educated Financial Advisor and also be aware of your state’s rule against perpetuities (“RAP”), which provides that an interest in trust is invalid if it can last longer than the lives of persons named in the trust plus 21 years.

Now’s the time to invest in your financial health These may be your earning years, and retirement may feel like a lifetime away. But now is the time to lay the financial foundation for your future. Commit to making an investment in your long-term financial health by scheduling a fiscal checkup. Call for a complimentary portfolio consultation and a discussion about healthy investing for your future.

F I N A N C I A L H E A LT H

Ricardo Rivers, MBA Associate Vice President – Investments

989 Lenox Drive, Suite 200 Lawrenceville, NJ 08648 Direct: (609) 896-4623

ricardo.g.rivers@wellsfargoadvisors.com fa.wellsfargoadvisors.com/ricardo-rivers

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ASK THE DOCTOR

JANUARY/FEBRUARY 2019