The Millstone Times February 2019

FAMILY MATTERS

WHAT IS A DYNASTY TRUST? Answer: 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 beneficiaries, excluding the assets from the clients’ taxable estate and potentially excluding the assets from the beneficiaries’ taxable 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 incentives to help beneficiaries learn more about handling and investing money before they have con- trol of inherited assets, motivate beneficiaries to become involved with philanthropy, 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 irrevocable trust for the benefit of one or more beneficiaries such as children or grand- children. The client can name the trustee(s). The trustee would be em- powered 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 purposes. This provides ad- ditional benefits because by paying the income tax on the trust’s in- come, 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 Dynasty 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 Dy- nasty Trust. The GST tax is a tax on lifetime and testamentary trans- fers 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 income 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 in- terest in trust is invalid if it can last longer than the lives of persons named in the trust plus 21 years.

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The Millstone Times

February 2019