Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Planning Ahead A Couple Of Generations

U.S. estate tax laws have been in flux for most of a decade, and the biggest changes are yet to come. Unless Congress dictates otherwise, the individual estate tax exemption is due to jump from $2 million in 2008 to $3.5 million in 2009. The following year, there’s an unlimited exemption (in other words, no estate tax at all), and in 2011,the exemption drops to $1 million. Yet as crazy as all of this may seem, a standard estate-planning tool—the “dynasty” trust—can help you avoid problems.

A dynasty trust, a type of generation-skipping trust, is an irrevocable trust that could benefit several generations of your family. Set up correctly, it can help you sidestep gift and estate taxes while also shielding trust assets from creditors. And the sooner you establish the trust, the longer its assets will have time to grow.

With a typical dynasty trust, you’ll designate your children and grandchildren as discretionary beneficiaries. Then, when your children die, the trust remains in effect for their children, with payments continuing for generations. Because beneficiaries don’t own the assets—instead, they receive income from the trust—there are no estate taxes when a beneficiary dies. That lets the principal keep growing, and assets may be shielded from divorcing spouses, court judgments, and other creditors.

When considering a dynasty trust, there are several tax rules and exemption amounts to keep in mind. The exemptions from estate tax also apply to something known as the generation-skipping transfer (GST) tax, which applies to gifts to generations beyond your children. Moreover, everyone is entitled to a $1 million lifetime exemption from gift tax liability, plus you can make yearly tax-free gifts of up to $12,000 to as many beneficiaries as you like, as long as a “Crummey” provision is diligently applied and executed.

In establishing a dynasty trust, it makes sense to embark on a simple wealth transfer program, making annual $12,000 gifts to all of your children and grandchildren. Your spouse can do the same. If you designate, say, eight yearly recipients, together you’ll be able to move $192,000 out of your estate each year. In 10 years, that’s almost $2 million.

Your next step could be to fund a dynasty trust with $1 million (or $2 million for a couple), using up your lifetime gift tax exemption. There’s one catch, though. Gifts in excess of the $12,000 per year reduce your estate tax exemption dollar for dollar. So if you start a trust with a $1 million gift and then die in 2009, for example, your estate will be able to exclude only $2.5 million from estate taxes, not the $3.5 million otherwise allowed.

And if you’d like to begin the trust with more than $1 million, perhaps using up the higher GST exemption of $2 million in 2008 (or $3.5 million in 2009), a lifetime qualified terminable interest property (QTIP) trust could help. A QTIP trust allows the surviving spouse to use the trust property with taxes deferred until his or her death, after which the trust property goes to the final trust beneficiaries, who were named by the first spouse to die.

The federal government imposed the GST tax in 1986 to prevent people from using trusts to circumvent estate taxes of the next generation of heirs. Now, you can take advantage of the recent increases in the GST tax exemption by making lifetime gifts to a QTIP trust of up to the GST exemption amount.

Then, through your spouse’s will, stipulate that upon the spouse’s death, any estate taxes on this money will be paid with funds from his or her estate, outside the QTIP. That would allow the trust assets to pass to future generations without being reduced by estate taxes.

The longer a trust continues in existence, the greater its potential appreciation. To extend the life of a dynasty trust as long as possible, set it up in a state that allows such trusts to continue for hundreds of years or in perpetuity—which is the point of a dynasty trust. Most states have laws forcing trusts to terminate 21 years after the death of the last beneficiary living at the time the trust was created, though more and more states are extending that time limit. If you don’t reside in a state that has repealed or extended the maximum term for trusts, consider establishing your trust in another state with more favorable laws. That’s permitted as long as the trust has some connection to the state. One simple way to meet that requirement is to choose a trustee there, which could be a corporate trustee. But, be aware there is not yet any case law sustaining the effectiveness of a dynasty trust established in a state other than the state of the beneficiaries’ residence as it relates to asset protection.

We can work with your attorney to help you decide whether a GST, dynasty, or QTIP trust makes sense as part of your long-term financial and estate plan.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.

©2018 Legend Financial Advisors, Inc.®. All rights reserved.