A dynasty trust is a device used to pass money to multiple generations of descendants, paying as little estate tax as possible. Such trusts have no expiration date and don’t require minimum distributions, so their assets can continue growing for an unlimited number of generations.
Dynasty trusts grew out of the imposition of generation-skipping transfer taxes on trusts that transferred assets to grandchildren, as well as the decision in some states to repeal the rule against perpetuities, which had put limits on the ability to pass gifts to remote descendants.
Dynasty trusts are a very effective tool for producing long-term family wealth, and interest in them has increased since individual gift and estate tax exemptions have risen, allowing an increased amount of tax-free money to be placed into dynasty trusts.
The current estate tax exemption, $5 million per person, and will remain at that level until the end of next year. In 2013, it is set to decrease to $1 million unless Congress acts. In 2013, top tax rates are set to rise as well, from 35 percent to 55 percent, unless action is taken. The same defaults apply to gifts that skip a generation.
Many states permit dynasty trusts, but Delaware is a particularly favored state in which to set them up, since there are extra perks, like increased creditor protection and the ability to exclude trust assets in divorce proceedings. Delaware is among several states-the others are New Jersey and Pennsylvania-which allow trusts which never expire. Delaware also has a fairly simple process for modifying trusts and more flexibility to invest in certain types of assets.
In our next post, we’ll continue looking at the topic of dynasty trusts.
Source: Bloomberg, “Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever,” Elizabeth Ody, 28 July 2011.