Building a Lasting Legacy with Dynasty Trusts
Family wealth protection and growth over time make dynasty trusts an important estate planning tool. They are created for the purpose of supporting your assets’ growth through the years and reducing the amount of estate and generation-skipping taxes you owe. This article will explain dynasty trusts, how they work, and why they may be right for your family.
What Are Dynasty Trusts?
A dynasty trust is a type of irrevocable trust that can last for many years, and in some cases, forever. It is set up to pass wealth from one generation to the next while avoiding estate and generation-skipping taxes. Because the assets stay in the trust and can grow over time, future generations can benefit from that growth.
How Do Dynasty Trusts Work?
When you decide to create a dynasty trust, you move your assets into the trust in your lifetime. The assets that can be transferred include cash, stocks, real estate, and even business interests. When you pass away, the assets in the trust will not be included in your estate taxes because they belong to the trust. Those assets will not be subject to estate taxes when you die.
Over time, the assets in the trust can grow in value and can be transferred to your children, grandchildren, and other future generations. Since the trust is set up to avoid multiple taxation, more of your money will stay with your family.
Benefits of Dynasty Trusts
Here are the advantages of including dynasty trusts in your estate planning strategy:
Tax Savings: The trust precludes estate and generation-skipping taxes whenever wealth is passed from one generation to the next.
Asset Protection: The dynasty trust protects the assets from the creditors of the beneficiary or from the beneficiary’s ex-spouse.
Long-Term Growth: Since the trust is not taxed repeatedly, the assets have the potential to grow very high in the years to come.
Control Over Distribution: You can control under what conditions and how often the trust funds can be distributed. For example, you can specify that the money is for education, medical care, or other essential needs.
Things You Should Know When Setting Up a Dynasty Trust
There are certain things you should know before creating a dynasty trust:
1. Where to Site the Trust
Another important factor is where you decide to locate your trust. Some states allow perpetuity trusts, while others have rules regarding how long a trust can last.
Dynasty trusts are typically created in Delaware, South Dakota, and Nevada because they have lenient laws and may not require the trust to pay state income tax on its profits.
2. Choosing the Right Assets
Think about which assets you want to put into the trust. Equities and real estate are best suited for a dynasty trust because they can keep on growing without being charged for when the money is transferred to the next generation.
3. Funding the Trust
You can fund a dynasty trust immediately with a lump sum gift or over time using your annual gift exclusion. This will depend on the time you decide to create the trust and your financial situation at the time.
4. Setting Distribution Rules
Conditions on how the trust's funds can be spent may help preserve its wealth for future generations. For example, you could allow expenditures for education, health, or basic needs only. This can help ensure that the trust’s assets are used accordingly.
Choosing a Trustee
This is why it is crucial to choose a knowledgeable trustee to run a dynasty trust. The trustee is able to manage the trust assets and ensure that the trust is executed as you have desired. It is common for families to select a professional trust company or an individual with a lot of experience in trust management and the knowledge of the long-term responsibilities of the trust.
Get Started Today
At Falcon Wealth Planning, we are here to assist you in determining whether a dynasty trust is the best strategy for your estate planning needs. Get in touch with us today to find out how you can ensure that your family’s financial future is secure for many years to come.
*The content in this blog is for general informational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Falcon Wealth Planning, Inc., a fee-only, true fiduciary, registered investment advisor, provides this information to give a broad understanding of financial concepts and strategies.