If you expect to leave behind a large estate to provide for your family members, careful planning can protect your assets from taxes and other expenses. You may want to consider a type of irrevocable trust known as a dynasty trust.
Unlike a standard trust, a dynasty trust can last for decades, supporting your loved ones for generations to come. California law allows a trust to exist for up to 90 years before dissolution, while most states allow a trust to persist for 21 years after the individual’s date of death.
Benefits of a dynasty trust
In 2020, you can add up to $11.58 million to a dynasty trusts without incurring federal estate tax that your heirs would otherwise owe on those funds. Appreciation of assets in the trust is also tax-exempt. Although beneficiaries must pay income tax on distributions from the trust, you can shield them from this responsibility by transferring tax-free municipal bonds, non-dividend paying stocks and other assets that do not produce taxable income into the trust.
Because you no longer own assets held in this type of trust, your creditors cannot seek debt payment from the trustee. You also maintain control over the beneficiaries of the trust by leaving money not just to your children, but also to your grandchildren, great-grandchildren and beyond.
Operation of a dynasty trust
To create the trust, you must appoint a trustee, typically a professional trust administration firm or financial institution. The trustee will manage the assets in the trust based on your instructions, which can be as thorough as you need to meet your estate planning goals. For example, you can decide whether all trust assets will go to future generations or if beneficiaries can leave some assets to other individuals.
Keep in mind that you cannot change an irrevocable trust after you have established this arrangement. Make sure that the terms of arrangement meet the guidelines for a dynasty trust to avoid an unexpected tax burden for your children and grandchildren.