Using a Dynasty Trust to protect your estate and your assets and those of your children from disability, divorce, death taxes, and debt

By: Joseph T. Buxton III, CELA*, Founder, TrustBuilders Law Group 

As legacy and estate planners, we are often asked “How do I protect the assets from death taxes, from the costs and inconvenience of probate? And how do I prevent my children from losing these assets after my death to divorce, disability or debts?” The best answer to these questions is to use a special type of Revocable Living Trust commonly called a “Dynasty Trust”.

Beginning in January 2013, the exemption for individuals from federal estate taxes increased to $5.2M.  At the same time the generation skipping taxes exemption, which applies to assets left in trust for the benefit of children, grandchildren, great grandchildren, and beyond also increased to $5.2M per taxpayer. Each exemption is to be further adjusted for inflation  As a result, a married couple can effectively set aside in trust up to $10.4M after their deaths, (and more in future years), for the use and benefit of their children, and their children’s children. This is a Dynasty Trust.

Does a Dynasty Trust mean that your children or grandchildren will lose enjoyment of the assets left in trust for their benefit?  Absolutely not.  A properly drafted Dynast Trust normally provides that all trust income be distributed to your children, and then after their deaths, to your grandchildren.  The trust principal can be used for health, support, maintenance and education of your children and grandchildren.  In addition, current IRS rules permit the beneficiary to withdraw up to 5% of their trust principal annually for any purpose, without the trust considered as part of their taxable estate when the beneficiary dies.  Finally, we often include in a Dynasty Trust, a special provision known as a “Power of Appointment”, giving the beneficiary specific authority to specify in his or her will how the assets in the trust will pass to their children or grandchildren.  In other words, the assets can remain in the trust indefinitely for the needs of a child or grandchild or other beneficiaries or descendants.

I am often asked, “Is there any good reason why an individual should not consider a multi-generational asset preservation “Dynasty” trust to protect the family assets?” The answer is, in may cases, “No.”  In fact, you can name your children as trustees on a Dynasty Trust so that the children actually control and manage their  trust, yet they do not own it.  So, if a child ever becomes subject of bankruptcy proceedings, divorce, or if the child has a special disability or ends up in a nursing home, those assets in that child’s share of the Dynasty Trust are protected and preserved.

When reviewing your estate plan with your elder law attorney, estate planning counsel or financial advisor, ask for an explanation of the pros and cons of using a Dynasty Trust to protect your assets for yourself and future generations.

 

* Certified Elder Law Attorney by the National Elder Law Foundation