When you begin your estate planning, it is important to have the future in your sights. Not just your children, but beyond them to future generations. One way of making sure your beneficiaries receive your assets and not the Internal Revenue Service is to set up a dynasty trust.
This type of trust ensures that the people you want to benefit from your funds are getting them and not the government. It can last forever and your kids and their kids can benefit from the wealth that you worked hard to earn. Your children receive benefits that you outline and then when they pass away, their children benefit and so do their kids.
When estate planning takes place, transferring an asset to your trust can be subjected to a gift tax; however, you can give a gift of up to $5.35 million without a tax being applied. It doubles to $10.68 million if you are married and giving a gift with your spouse.
For example, if you child dies after you give him or her a gift and his inheritance from your trust transfers to his kids, you avoid estate taxes because the assets never were actually owned by your child. The trust owned the assets.
To keep income tax low on trusts, the dynasty trust needs to rely on municipal bonds, low or no-dividend stocks or non- or low-income assets that may appreciate.
A dynasty trust can be structured as a grantor trust also and that makes it a tax-free entity. In this case, the owner pays taxes on the income and can avoid gift taxes.
The location of the trust is especially important. Twenty-three states and the District of Columbia allow for dynasty trusts into perpetuity. It is a good idea also to choose a state that doesn’t have state income tax.
Just because you don’t live in the state that houses your trust shouldn’t stop you from setting one up there to protect you and your beneficiaries.
Setting up a trust is something that you may feel comfortable doing with an experienced legal professional. He or she will be able to answer your questions, know the laws of New York and suggest how to best set up an estate plan for your circumstance.
Source: Modern Machine Shop, “Preserving Your Money for Future Generations” Irving L. Blackman, Aug. 15, 2014