Legal Blog

The Weekly Scenario from Steve Shane – 7.15.13

Question:  What is a “Dynasty” Trust and what is it generally used for? Answer:  A Dynasty Trust is a trust that is intended to last for multiple generations for the purpose of building wealth.  As a little background, years ago Congress enacted a generation skipping transfer tax designed to curb the wealth building effects of dynastic (or multiple generational) planning. The generation skipping transfer tax is levied at the highest marginal estate tax rate and is a tax that is an additional tax to the federal estate tax.  The objective of dynasty planning is to pass the maximum amount of wealth you can to grandchildren (and subsequent generations) without subjecting the transfers to the so-called ‘generation skipping’ or “GST” tax.  By allocated GST exemption to the trust when the gift is made, one can exempt the trust property from future GST (and typically estate) taxes. Allocating one’s GST Tax exemption to a dynasty trust for grandchildren and subsequent generations will cause the trust to be exempt from GST tax.  The concept is that assets that are not subject to these taxes have the potential to grow much faster than wealth that is taxed at each generational level and that the property transferred to a dynasty trust may accumulate and grow faster than wealth transferred outright. Once property is exempted from the GST tax, all the future appreciation and growth of the underlying assets in the trust also remain exempt from the tax. Comment:  Aside from the tax considerations, there are also non-tax reasons for creating the dynasty trust, in that Dynasty trusts can be created to provide creditor protection for the trust beneficiaries.  For example, by not making an outright distribution to a beneficiary, if the beneficiary were to have serious creditor problems or divorce her spouse, the assets in her trust would not likely be subject to forfeiture or seizure. Moreover, for families that want to centralize a family business or real estate holdings, the trust can provide a good vehicle for central management of property for investment and ensuring wise use of the funds. For many families, the value of a college education is their most valuable legacy.  Dynasty Trusts are often used as a way to establish a fund that will pay these educational expenses for future generations of the family.  You would be hard pressed to find a more noble legacy than that! Steven E. Shane Principal Offit│Kurman Attorneys At Law 301.575.0313 Washington 443.738.1513 Baltimore 410.218.9339 Mobile 301.575.0335 Facsimile Please note the above material discussed is intended to provide only general information. Do not, under any circumstances, solely rely on this information as legal advice. Legal matters are often complicated. For assistance with your specific legal problem or inquiry please contact me directly.