Establishing dynasty trusts has some major benefits for those seeking to protect generational wealth. One of the primary purposes of dynasty trusts is to shelter family assets from the effects of transfer taxes for generations. Here’s what you need to know about them.
The purpose of the dynasty trust is similar to that of many other trusts, namely to protect family wealth from creditors, spouses, ex-spouses, and lawsuits, and to ensure that it passes from generation to generation with the least amount of tax burden possible on your descendants. Dynasty trusts are usually started and funded with at least a minimum of $1 million. At their core, dynasty trusts are designed to allow as much of the trust estate as possible to pass from generation to generation without triggering estate and gift tax liability every time it is passed on. Even though the Generation-Skipping Transfer Tax (GSTT) may apply to dynasty trusts, each individual still has an amount that may be exempted. As of 2023 this amount was $12.92 milh3on.
By virtue of Florida law, dynasty trusts created for the benefit of others—usually subsequent generations—may continue to exist for the life of the beneficiaries plus 360 years after the beneficiaries have died. The net effect of this rule is that a family can control and grow a sizeable portion of wealth over literally generations of family members without substantial tax burdens (assuming there is no major change in the GSTT).
In addition to the longevity of these trusts, they are also attractive as they can be set up to be virtually impenetrable to future creditors. These creditors include those from future divorces, civil suits, or bankruptcy. Any of these events can deplete or even extinguish assets. By placing them in a dynasty trust, however, these assets become very hard for creditors to reach, while still providing a source of income to the beneficiaries.
A typical dynasty trust requires that trust assets remain in the trust indefinitely even as beneficiaries die and their successor beneficiaries become vested. It is possible, however, to modify these trusts into a hybrid version that allows for more flexibility for immediate beneficiaries. One option under the hybrid version includes permission for beneficiaries to withdraw certain amounts of principal. Withdrawals might be limited to specified amounts annually, or they might be limited to occurrence only upon reaching predetermined dates or ages. The hope, of course, is that the bulk of the trust assets will remain within the trust so that future generations can benefit from them as the current generation has. However, this version also recognizes the realities of the current generation and the need to have more ready access to capital.
Dynasty trusts sound complicated, but the reality is that in the hands of a competent and knowledgeable trust attorney, they are fairly straightforward. Establishing a dynasty trust will require some soul-searching and answering potentially hard questions including identifying the assets that will be placed in the trust, determining eligible beneficiaries, and setting timetables, if any, for when capital may be withdrawn. These are important questions to consider, however, and will assist not only in creating the trust but also in additional estate planning.
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