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The many advantages of gifting assets to a trust include asset protection, tax planning and maintaining family control until the beneficiary reaches adulthood.
A dynasty trust—any trust that lasts longer than one generation below that of the grantor—can be a useful estate planning tool for multi-generational families. While it’s important to consider the advantages and limitations of any wealth transfer strategy, dynasty trusts have two unique benefits that make them attractive.
According to the American Bar Association, the GST tax is imposed on asset transfers to grandchildren and more remote descendants that exceed the exemption limits, so that the transferor cannot avoid transfer taxes by "skipping" a generation. The GST is not a substitute for gift and estate taxes; rather, it’s levied in addition to these taxes. An individual can give up to $11.4 million worth of assets (the GST tax-exempt amount) to a trust in 2019. Trust assets are protected from transfer taxation for as long as the trust document and state law allow.
Dynasty trusts take advantage of the federal GST tax exemption by removing family wealth from the transfer tax system for as long as the trust is in existence and income and principal is used to benefit each succeeding generation. Moreover, an additional benefit is that the GST tax exemption can often be extended by transferring assets subject to valuation discounts.
In most instances, grantor trusts treat the trust creator as the owner of the trust assets for income tax purposes so that trust principal can grow free of income tax. Structuring the trust as a grantor trust adds a second layer of tax benefit to a dynasty trust.
Specifically, the estate planning benefits of the asset transfer are boosted by the grantor making the income tax payments instead of the trust. Put differently, the assets in the trust aren’t reduced by income taxes. In addition, any income taxes paid by the grantor reduce the size of the grantor’s overall taxable estate when calculating estate taxes.
For many families with significant wealth to transfer to future generations, dynasty trusts can be useful tax and estate planning tools. There are a variety of strategies you can implement using dynasty trusts, so it’s important to discuss your options with an an estate planning attorney and Certified Public Accountant (CPA).
To learn more, please contact my colleague, Theresa Marx, or read our white paper on the same topic, Lifetime Gift Planning.
Cathy Schnaubelt is a senior wealth strategist in CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This blog originally appeared on Forbes.com
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