Should I Set Up a Dynasty Trust?


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What is a Dynasty Trust?

A dynasty trust is a long-term, irrevocable trust designed to pass on and manage wealth for multiple generations. It allows individuals to transfer assets, such as money, property, investments, or closely-held business interests into a trust for beneficiaries (typically family members) while minimizing estate tax, gift and generation-skipping transfer (GST) taxes and protecting the assets from creditors and potential squandering. The trust's structure ensures that it can continue for several generations, providing financial security and legacy preservation. Types of dynasty trusts include SLATs(Spousal Lifetime Access Trusts), ILITs (Irrevocable Life Insurance Trusts) and IDGTs(Intentionally Defective Grantor Trusts).

When are Dynasty Trusts used?

Dynasty trusts are often incorporated into the estate planning of clients who have or are building significant wealth. For example, upon the death of the survivor of you and your spouse, the assets could be left in a dynasty trust for the benefit of future generations. They are also great receptacles for distributions from GRATs (Grantor Retained Annuity Trust) that terminate after a period of years. In addition, IDGTs (Intentionally Defective Grantor Trusts) and SLATs (Spousal Lifetime Access Trust) are also frequently structured as dynasty trusts. So, the term is not mutually exclusive from other types of irrevocable trusts; it’s just a useful way of identifying a trust that can qualify for exemption from estate, gift, and generation-skipping transfer (GST) taxes and last for multiple generations

How does a Dynasty Trust work?

A dynasty trust works by transferring assets into an irrevocable trust. The trust is managed by a trustee, who follows the instructions laid out in the trust document. Beneficiaries, typically family members, receive distributions from the trust according to the terms specified in the trust. By being irrevocable, the trust's assets provide long-term wealth preservation and management for future generations.

Are there any disadvantages to using a dynasty trust?
The disadvantages of using a dynasty trust include:

  1. Irrevocability: Once assets are transferred to the trust, it becomes difficult to change or revoke the terms, limiting flexibility in the future.
  2. Complexity and cost: Setting up and maintaining a dynasty trust can be complex and costly due to legal and administrative expenses.
  3. Loss of direct control: The grantor relinquishes direct control over the trust's assets, relying on the trustee's decisions and adhering to the trust's instructions.
  4. Perpetual existence challenges: Keeping a trust going indefinitely can present challenges, such as finding capable trustees and ensuring the trust's purpose remains relevant over time.
  5. Taxation and regulations: Changes in tax laws or regulations may affect the benefits of using a dynasty trust, requiring periodic review and possible adjustments.

What assets should I put in a dynasty trust?

Assets commonly placed in a dynasty trust include cash, investments, real estate, business interests, valuable personal property, and other forms of wealth. Generally, any assets that appreciate in value and can benefit future generations while aligning with the trust's objectives can be considered for inclusion.

What is the minimum I should put in a dynasty trust?

The minimum amount required to fund a dynasty trust can vary depending on factors such as the trust's purpose, intended beneficiaries, and the cost of setting up and maintaining the trust. There is no strict legal or practical minimum, but it is essential to consider that the expenses associated with creating and managing the trust might make it more practical for larger estates.

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