The Basics of Dynasty Trusts

Dynasty trusts are tools that allow the grantor (the person who funds the trust) to pass assets down to future generations without the burden of estate and gift taxes that might apply to each transfer if the estate’s value exceeds the exemption amount. These estate planning tools are typically created by wealthy people and are designed to eliminate multiple tax events that could occur on funds left by the original grantor. Some of the basics of a dynasty trust are:

The trustee typically will not be a person, but a bank or similar longstanding institution, since the trust is designed to span decades.

The tax benefit from a dynasty trust will flow to future generations, since there is no federal estate tax liability when the trustee authorizes distributions. For instance, if a mother leaves her daughter her estate a will and it exceeds the exemption amount, that would be taxed upon the death of the mother. Years later, when the daughter dies, what remains of the assets bequeathed to her would be taxed again when the daughter leaves it to her beneficiaries.

Assets placed in the trust are only taxed once when they are transferred in by the grantor. Any assets transferred to the trust are no longer part of the grantor’s taxable estate.

Currently, there is an exemption from federal estate tax of $11.7 million (the government indexes the exemption to the inflation rate). Therefore, a grantor can place up to $11.7 million in a dynasty trust free of federal estate taxes.

The trust has income tax liability for any income generated by trust assets. However, trustees can endow the trust with non-income producing investments, such as non-dividend paying stocks and tax-free municipal bonds, to minimize those taxes.

South Dakota allows dynasty trusts to exist forever, with no laws requiring them to terminate after a certain length of time. Some other states have what is called a “rule against perpetuities,” which stipulates that a trust can’t last longer than 21 years after the death of the last beneficiary who was alive at the time of the trust’s creation.

If you would like to consider a dynasty trust, or any other type of trust or estate planning tool, Anker Law Group, P.C., in Rapid City, South Dakota is ready to help you understand and take advantage of them. Call us at 605-519-5967 or contact us online to schedule an appointment.

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