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Could Your Legacy Be in Jeopardy?

Dynasty Trusts under fire; new law might make it more difficult to effectively pass our legacy to our grandchildren and their children.

 

My clients know that one of my passions is helping them to plan their legacy.  Whether that legacy is confined to family values or extends to their more tangible assets, let's face it, it's harder than ever to hold on to what is important to us in this ever changing world.  So when I read a report in The Wall Street Journal  that Dynasty Trusts were under fire and new law might make it more difficult to effectively pass our legacy to our grandchildren and their children, I thought I'd let you know.

The Dynasty Trust's main objective is to continue for several succeeding generations allowing them to benefit from the assets you have worked your lifetime to acquire for as long as possible.  To create maximum longevity, Dynasty Trust's usually allow beneficiaries access to income only in their trust share, so the trust’s principal assets remain intact to provide an income stream for future generations. Dynasty trusts have become increasingly popular since the 1986 tax overhaul and the current version of the “generation-skipping tax.” (GST). The GST imposes a levy on any transfer that skips a generation – such as those from grandparent to grandchild while the grandchild’s parent is still alive. You can avoid the GST, however, if your transfer skips more than one generation.

The Journal uses an example to illustrate:

Robert, a widower, has a net worth of $15 million and his heirs include children, grandchildren and great-grandchildren. If he leaves everything to his children and they in turn leave everything to theirs and so on, there could be an estate tax toll with each generation.

Robert would like to put his entire estate into a trust and skip layers of tax. But if he does, the generation-skipping tax kicks in and replaces the lost taxes—except for an exempted amount, which is currently $5 million per individual or $10 million per married couple. That $5 million can be pumped up using discounts, life insurance and other leveraging techniques.

Dynasty trusts push that generation-skipping tax exemption to the max, putting the exempted amount beyond the reach of estate taxes for the life of the trust. That, in turn, means the heirs don't have to "spend" their own exemptions on those assets.

Dynasty trusts are now allowed in Virginia as well as 22 other states and the District of Columbia. (You don’t have to live in a state to establish a trust there.)

When the Journal reports that Dynasty Trusts are under attack, they mean that the President’s budget proposal would remove the federal tax exemption after 90 years. So the trust can continue indefinitely, but the tax exemption cannot.

The Journal also suggests that the measure is unlikely to pass this year, but taxpayers should know that the idea is in play. As proposed, the change would apply to new trusts or additions of money to existing ones, but not to those already funded.  That’s the good news for my clients that have already created their Dynasty Trust but begs the question: have you planned for the future yet?

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