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

Estate planners can now write a trust that contains special provisions for the continuation of the trust after the client’s death(s) for the benefit of their children or beneficiaries.  This is known as a Dynasty Trust or Exemption Trust.  A separate Exemption trust will be set up from the original trust and for each of the beneficiaries identified.  The Exemption Trust is designed to protect the assets in the Exemption trust from the creditors of the beneficiary, from estate and death taxes at the death of the beneficiary, from claims of spouses in the event of a divorce, and to insulate assets in the trusts from being deemed available resources in the event of the beneficiary’s disability in case he or she is otherwise eligible to receive public assistance such as Medicaid or supplemental social security income.

The initial beneficiary may serve as the trustee of their Exemption Trust, and as such, will have full discretion with respect to the investment of the assets so long as they remain in the trust.  In addition, the beneficiary is entitled to all of the income from the trust, so long as he/she is not disabled and has the right to withdraw principle for their health support, maintenance, and education (with concurrence of a co-trustee or back-up trustee).  The beneficiary also has the right each year to withdraw 5% of the intangible property, i.e. cash, or cash equivalents, investments, etc. held by their trust for any purpose without restriction to health support, maintenance, or education.

Finally, the beneficiary of an Exemption Trust will have the limited power in their Last Will and Testament to use what is known as a “power of appointment,” to direct how the Exemption Trust shall pass at their death. 

Exemption trusts are designed to avoid the federal generation skipping tax (GST) up to the $5M individual generation skipping tax exemption permitted by law.  This exemption is presently the same level of exemption for the federal estate tax: $5 million in 2011-2012.  After 2012, the level of exemption is uncertain. 

Like the federal estate tax, the generation skipping tax exemption must be elected at the time of a taxpayer’s death.  Therefore, it is important where one is using a Dynasty Trust or Exemption trust, that, at the death of the grantor or grantors, the applicable generation skipping tax exemption be taken at each death.        

If you have additional questions regarding an Exemption Trust to be created after your death(s) for your children or beneficiaries, contact your estate planner or elder law attorney.

 

* Certified Elder Law Attorney by the National Elder Law Foundation