Save federal estate, gift and generation skipping transfer tax.
Protect assets from beneficiaries’ creditors.
Protect assets from grantor’s creditors.
Protect assets in divorce proceedings involving a beneficiary.
Prevent assets (such as stock in a close corporation) from being sold or encumbered.
Encourage beneficiaries to act in desired ways (such as to provide funds only if the beneficiary is not addicted to drugs, obtains a college decree, marries and has children, etc.).
Protect a beneficiary from improvidence or designing persons.
Manage assets for a minor or handicapped child or for someone who becomes disabled due to illness or old age.
Provide investment management.
Consolidate voting interests in closely held entities without having to deal with voting trust restrictions.
Reasons not to create a Dynasty Trust:
Financial resources are insufficient to create a dynasty trust.
Client does not obtain estate planning advice, and does not otherwise learn about dynasty trusts.
Client obtains estate planning advice, but is not informed of the availability of a dynasty trust, or is counseled not to use a dynasty trust.
Does not care about what happens to assets after death.
Believes children will need to spend their inheritances.
Wants children to be able to decide what to do with their inheritances regardless of tax consequences.
Does not want to “tie up” assets in trust.
Finds the subject to be too complicated or cannot understand it.
Does not choose the dynasty trust from the wide array of available legal and financial choices.
Does not devote sufficient time to estate planning because of demands on time by occupational, recreational, religious or other matters.
Finds the documentation to be too long or too complicated.
Believes that the costs of developing and implementing the plan are too high.
Planning the Dynasty Trust:
Should fund the trust as soon as possible. Once assets are placed in trust, appreciation will not be subject to transfer tax until after the trust terminates.
Don’t waste exemptions. If family resources are sufficient, an exempt Dynasty Trust should not provide for the following payments to non-skip persons (e.g. parents, siblings, children, nieces or nephews): mandatory income distributions; discretionary income or principal distributions; or unitrust distributions from a total return trust. If discretionary income or principal distributions are provided for, they should not be made, unless the beneficiaries’ other resources are insufficient. This is because the trust is designed to be GST exempt. Distributions to beneficiaries will be taxable in their estates.
Don’t give beneficiaries Crummey withdrawal powers. Beneficiaries might withdraw assets to which GST exemption has been allocated.
Don’t create a trust (such as a GRAT, a QPRT or GRIT) that is subject to an estate tax inclusion period because the GST exemption allocation is not effective until the estate tax inclusion period ends.
Consider making the trust a grantor trust. The funding of an exempt dynasty trust can be maximized by the grantor retaining some powers under Code Section 675, which requires the grantor to remain taxable on the income, without causing the trust assets to be includable in the grantor’s estate for federal estate tax purposes.
Maximize trust duration.
Minimize federal income tax.
Minimize state taxes.
Maximize investment return.
Maximize creditor protection.
Preserve confidentiality and minimize court costs. Extent of trust assets and identity of trust beneficiaries should be kept confidential. Cost of needless court proceedings should be avoided.
Provide appropriate judicial relief. If controversy arises, it should be resolved promptly by a court that will honor the grantor’s intent.
Use separate share trusts where possible. Probably fosters less litigation than a single “pot” trust.
Pay taxes out of assets other than the dynasty trust, if the trust is includable in the grantor’s gross estate.
Funding the trust:
Excellent. High-basis assets that will be retained and that will appreciate in value tremendously.
Very good. High-basis assets that will be retained.
Bad. Low-basis stock.
Horrible. Income in respect of a decedent or a bond having accrued interest if the trust treats the interest as received after the trust was funded and requires income to be distributed currently.
Administering and Investing Trust Assets:
Trusts should have inclusion ratios of zero or one.
Generally, an exempt dynasty trust should be invested for growth.
Generally, a nonexempt dynasty trust should be invested to produce current income.
Distributions to skip persons should be made from an exempt dynasty trust.
Distributions to non-skip persons should be made from nonexempt assets.
Medical and tutition payments should be made from nonexempt assets.