Grantors, with the help of an Attorney,
create a Dynasty Trust, designed to provide benefits to future generations.
Grantors use their GST tax exemptions to
make gifts to the Dynasty Trust. This gift may be gift tax free depending on the grantors' ability
to use annual exclusions gifts and/or applicable exemption amounts.
Trustee purchases a life insurance policy
insuring the grantors' lives. After the deaths of the insureds, the death benefit proceeds should
pass to the trust income, estate and GST tax free.
During children's lifetime, the trustee
has the discretion to distribute income and principal to them. The remaining trust assets should not be
included in children's estate.
During grandchildren's and
great-grandchildren's lifetimes, the trustee has the discretion to distribute income and
principal to them. If properly structured, the remaining trust assets should not be included
in their estates.
If trust expires due to the rule against
perpetuities, the trust proceeds will be included in the estate of the last generation. If trust
is created in a state with no rule against perpetuities, the trust can continue indefinitely for
the benefit of future generations.
A wealthy married couple wants to create a legacy for their children,
grandchildren and future generations. The federal tranfer tax system, however, is designed to tax
property each time it is passed from one generation to the next. If a donor passes assets to a
beneficiary who is two or more generations below him or her, a generation skipping transfer (GST)
tax is generally imposed in addition to any possible gift or estate tax to ensure that a tax is
imposed at every generation.
The wealthy married couple may consider a dynasty trust funded with
life insurance to achieve their goals in a tax-favored manner. A dynasty trust is an irrevokable
trust that uses some or all of the generation skipping transfer tax exemption of the donors
($1,500,000 per donor in 2004) to protect the trust assets from the GST tax and shelter the assets
from estate taxation in the estates of future generations. Unlike other types of irrevocable trusts,
a dynasty trust is designed to continue for as many generations as permissible under state law.
Depending on state law, the trust may terminate in the future according to the state's rule against
perpetuities which limits the duration of the trust. However, if the trust is established under the
laws of a state that has abolished the rule against perpetuities, the trust may continue indefinitely
for the benefit of future generations. If structured properly, the dynasty trust can provide an income
to future generations without subjecting the trust assets to GST or estate taxes in the estates of
future generations.
With the help of an attorney, the couple establishes an irrevocable trust set
up as a dynasty trust to benefit as many future generations as allowable under state law. The couple
allocates their GST tax exemption to transfer cash and other assets to the dynasty trust. Since the
allocation of GST tax exemption insulates future appreciation in the value of the trust assets from
the GST tax, purchasing a life insurance policy insuring the lives of the grantors in the dynasty trust
may be an excellent vehicle to maximize wealth transferred to junior generations. Depending on the amount
of the premiums, the clients may be able to shield all of the gifts to the trust from gift tax by using
annual exclusion gifts and/or applicable exemption amount. The trustee of the dynasty trust purchases a
life insurance policy insuring the clients' lives. After the insureds' deaths, the life insurance death
benefit proceeds will be paid to the trust estate and GST tax free. The heirs may receive distributions
from the dynasty trust unencumbered by estate or GST tax. At the expiration of the rule against
perpetuities, the trust will terminate and the trust assets will be includable in the last generation's
estate. However, if the trust is established in a state with no rule against perpetuities, the trust
can continue indefinitely for the benefit of future generations until the trust assets are depleted.
The Business Planning Group
3186 Eaglecrest Lane, Clinton WA 98236
Phone: 206-255-5700 Fax: 206-260-2721
At The Business Planning Group, Inc.™ (BPG) our focus is to provide our clients with strategic,
knowledge-based consulting and advice. At times, we may also assist our clients with securities-related services.
However, these services may only be provided to individuals residing in the states in which we are registered or
permitted to conduct securities-related business. The information contained in this website is intended for use
only by residents of these states or for individuals interested in BPG's financial planning and consulting services.
By viewing our site, you are verifying that you meet one of those two criteria. Fee-based consulting and advisory
services offered through The Business Planning Group, Inc.,™ an independently owned and operated Registered Investment
Advisor (RIA), registered in the state of Washington.
