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The Dynasty Trust — What, Why, How?
A "dynasty trust" is not so much a particular kind of trust as
a specially drafted trust with special features -- which enable
it to continue for a long time for many generations.
In General, it Is More Advantageous to Leave Assets for Your
Beneficiaries in Trust Rather than Outright.
The trust can provide a wide range of benefits for the family.
It can carry out your wishes and provision for the family down
the generations. If you wish, you can restrict succession to your
blood family. You can provide for management by a professional
trustee, and control the ages at which your descendants get
access to money, restricting their access.
Or you can leave more control in the hands of the beneficiaries
without going as far as outright distribution.
The important thing to realize is that a trust created by an
ancestor will only be included in a descendant's estate for tax
purposes if that descendant is given a general power of
appointment -- an unrestricted power to withdraw or to make it
payable to their estate or their creditors.. No other
restrictions on the descendant's s power are required for federal
tax purposes. You may want to put on other restrictions for
non-tax purposes but they are not required to avoid taxation.
This means that a beneficiary can have:
all the income for life (for various reasons discretion is
better);
principal as the trustee determines necessary for their health,
education, maintenance and support;
be, or have the right to name, the trustee who determines what is
necessary for their health, education, maintenance and support;
have the right to name [including unrestricted power to change]
the trustee who determines what is necessary for their or their
dependents best interests;
have a right in life or at death to give the trust to anyone
other than themselves, their estate, their creditors, or the
creditors of their estate;
all of this without inclusion in their estate.
You can even provide that during their early years the
beneficiaries are restricted, while allowing for increasing
control as they mature -- in contrast with forcing outright
distribution.
A trust can benefit your family even if they never draw any
income from it.
Not only could the trust own the business your descendant founds,
from which they draw a salary, or provide the capital for a
business venture.
More important, the trust can be the umbrella in the closet for
the rainy day -- which means your descendants can spend more of
the income they have otherwise, knowing they needn't set any
aside for the rainy day.
At the same time it can protect your family, and the assets
you've built up, from the disadvantages of ownership.
If they own an asset, their creditors can levy on them if they
become liable, whether because of injuring someone or a business
failure. If a visitor slips on your grandchild's porch and sues,
the trust assets are protected.
If they own an asset, it becomes a target for claims by an
estranged spouse. Again, trust assets can be protected.
Finally, it is subject to taxation at every generation,
diminishing the family wealth faster than it can be increased. A
good part of planning for a dynasty trust is to protect against
this tax cost. Larger estates require even more special drafting
to deal with the generation-skipping transfer tax and make
maximum use of the exemptions. Much of the great family wealth in
our country has arisen from this simple protection from
generation to generation.
Consider the simple difference, starting with a million dollars,
between having it grow to be taxed each generation, or paying out
half its income, yet avoiding that generational bite.
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