Managing estate taxes can be a significant challenge for many affluent families and individuals. Therefore, careful planning is the best way to reduce estate taxes and maximize assets transferred to heirs.
In the absence of an adequate plan, heirloom property or a family business that involved a lifetime of hard work may have to be sold to satisfy tax obligations.
Fortunately, there are several planning mechanisms that can help individuals maintain wealth for generations to come. One such tool is the dynasty trust.
A dynasty trust, also known as a family bank or family trust, is a form of trust that can help reduce estate taxes and also provide control over how trust assets are distributed to future generations.
With a dynasty trust, you control who the money goes to and in what amounts over an unlimited amount of time, without limitation by the rule against perpetuity.
The rule against perpetuity dates back to English law and states that an irrevocable trust may not last longer than the life of the living beneficiaries at the time the trust is created, plus 21 years.
The application of the rule against perpetuity varies from state to state, which underscores the need for qualified legal and tax professionals with expertise in estate planning when contemplating a dynasty trust.
A dynasty trust may be established by combining a trust with a limited liability company or a family limited partnership.
You and your family then transfer cash or other assets to the trust, either all at once or annually.
Funding the trust may trigger gift taxes. But gifts that are properly structured may also receive a discount for transfer tax purposes.
The trust agreement will specify the trust's beneficiaries, the conditions under which theyreceive income and/or principal, provisions for loan arrangements to beneficiaries, the term of the trust, and the distribution of trust assets at termination.
Stretching out benefits
Creating your own "family bank" can be a very tax-cost effective way to leave a substantial legacy for many generations to come.
It allows you to designate how much, whenand under what circumstances your heirs will receive income, principal or both.
It can also ease worries
of a future heir squandering an inherited lump sum. You can establish specific conditions that beneficiaries must meet in order to receive funds, and you may also include incentive programs that reward the achievements of heirs.
A dynasty trust can be a powerful estate planning mechanism for efficiently transferring wealth to future generations. Keep in mind, however, that like all estate planning matters, dynasty trusts are complex and require qualified legal and tax counsel to draft and execute.
Gary W. Plum, financial adviser with Morgan Stanley Smith Barney in Bradenton, can be reached at 941-714-7939.