2 Reasons Why a Dynasty Trust May be an Attractive Strategy

This is the second blog in a four-part series that focuses on estate planning strategies.

There are many reasons to make gifts to younger family members in trust for their benefit rather than outright. Some of the benefits include asset protection, tax planning, and family control. When creating a trust for many generations, one common strategy is a dynasty trust.  A dynasty trust is any trust that lasts longer than one generation below the grantor’s generation. Dynasty trusts have two unique aspects that make them an attractive wealth transfer strategy.

1. GST TAX EXEMPTION

Dynasty trusts take advantage of the federal generation-skipping transfer (GST) tax exemption ($11.4 million per individual in 2019) to remove family wealth from the transfer tax system for as long as the trust is in existence. These trusts are an effective use of the GST tax exemption for several reasons, including:

• For 2019, an individual can give up to $11.4 million worth of assets to a trust and protect the assets in the trust from transfer taxation for as long as the trust document and state law allow.
• The trust’s income and principal can benefit each succeeding generation
• The GST tax exemption can be further leveraged by transferring life insurance policies or assets subject to valuation discounts to the trust

2. GRANTOR TRUSTS ADD ANOTHER LAYER OF TAX BENEFIT

In most instances, when a trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes but two separate entities for transfer tax purposes.  This treatment requires the grantor to pay the trust’s income taxes and, therefore, adds a second layer of tax benefit to a Dynasty Trust due to a few key features, including:

• Payment of income taxes by the grantor enhances the estate planning benefits of a transfer, as the assets within the trust will not be diluted by income taxes
• Income taxes paid by the grantor reduce the size of the grantor’s taxable estate for estate tax purposes

Working with an estate planning attorney and Certified Public Accountant (CPA) is often helpful to determine whether this strategy is right for you and your family. For more information, visit our Lifetime Gift Planning resource page.

Theresa Marx is a senior wealth strategist for CIBC Private Wealth Management in Chicago, with 15 years of industry experience. In this role, she is responsible for developing integrated wealth management solutions and providing comprehensive estate and financial planning services to high net worth clients.