How a Dynasty Trust Can Save You Money on Estate Taxes

Some wealthy individuals create enough wealth during their lifetimes to provide for not only their children, but also for their grandchildren. Many wealthy clients use a dynasty trust as a formal and legal method to preserve their estate for future generations.

A dynasty trust can help you create a legacy that stretches to your grandchildren and beyond. A dynasty trust differs from other trusts because it provides for multiple generations, with an impact that reaches many years into the future.

Creating a Dynasty Trust

Estate and gift taxes are levied every time assets change hands from one generation to the next. Dynasty trusts avoid these taxes by creating a second estate that will outlive most of the family members, and continue providing for future generations.

Dynasty trusts are long-term trusts created specifically for descendants of all generations. Dynasty trusts can survive 21 years beyond the death of the last beneficiary alive when the trust was written.

So, if you are establishing a dynasty trust today, and you have a young grandchild, your dynasty trust could last well over 100 years. A dynasty trust can distribute income and principal exactly the way you would have wanted well after you have died. In essence, allowing grantor’s to control their assets even after they die.

A properly established dynasty trust will not subject your descendants to estate taxes during the life of the trust. The only time when estate or gift taxes may become due is at the point when assets are transferred into the dynasty trust. If you follow the allowable limits, there may not be any taxes due at the time of transfer as well.

The grantor’s children are usually the recommended beneficiaries of a dynasty trust. After the last child dies, the grandchildren, or great-grandchildren become the beneficiaries.

The dynasty trust, like any trust, has a trustee that controls it. The trustee can use trust income or principal for the benefit of the beneficiaries.

The dynasty trust allows responsible beneficiaries to have total control and access to their trust assets. For beneficiaries that are not as financially responsible, certain provisions restricting their access to trust income or principal can be added into the trust.

By limiting beneficiaries’ access, such “spendthrift clauses” can also prevent creditors of a beneficiary from raiding trust assets for indebtedness, or prevent the divorcing spouse of a beneficiary from laying claim to trust assets.

Spendthrift clauses and dynasty trust’s should  be always properly drafted by an experienced estate planning attorney. An attorney, who is familiar with the grantor’s estate, can also create discretionary clauses. Discretionary distributions can be conditioned on each beneficiary being able to support himself or herself on their own.

The trust itself can be created during a grantor’s lifetime, or a portion of the grantor’s estate can be used to fund the dynasty trust at death. Creating a dynasty trust while alive allows the grantor to leverage their $$5.49 million generation skipping transfer tax  exemption.

The dynasty trust will shelter not only the value of the assets transferred inside the trust, but also any appreciation of those assets.

How Is a Dynasty Trust Funded

How Is a Dynasty Trust Funded?

A dynasty trust is typically funded by either ongoing annual gifts or by moving assets directly into the trust according to current estate planning guidelines.

Dynasty trusts should only be funded with certain types of assets. The Internal Revenue Service taxes the income from these trusts at close to 40%. So, the assets placed inside the dynasty trust should normally be tax-free, so as not to incur an annual tax bill. So,non-dividend growth stocks, tax-free municipal bonds, and life insurance policies are often popular choices.

There are no immediate tax savings when you implement a dynasty trust. Most dynasty trusts are funded using your your Estate Tax Credit. In 2017, an individual can give away $5.49 million of asset without that amount becoming subject to gift taxes. If a couple is giving money away together the amount doubles  to $10.98 million.

So, the tax savings occur later at the deaths of your descendants. Even after the trust’s assets have been accumulating for years, they remain free from federal gift and estate taxes for the life of the dynasty trust.

That means no federal taxes on:

  • Distributions from the trust to the founder of the trust or the grantor’s descendants while the trust is in force
  • Distributions at the descendants’ death while the trust is in force
  • Distributions of trust assets when the dynasty trust ends

Allowing wealthy couples to transfer $10.98 million into a dynasty trust during 2017 is a tremendous estate planning tool. Not to mention,  how much this money will appreciate over the next  50 or 60 years!

Funding a Dynasty Trust with Life Insurance

Funding a Dynasty Trust

Dynasty trusts should only be funded with certain types of assets. The Internal Revenue Service taxes the income from these trusts at close to 40%. So, the assets placed inside the dynasty trust should normally be tax-free, so as not to incur an annual tax bill.

This makes non-dividend growth stocks, tax-free municipal bonds, and life insurance policies are popular choices for dynasty trusts.

Many grantor(s )also choose to use their dynasty trust as an irrevocable life insurance trust. The trust is then funded with either Guaranteed Universal Life or Survivorhip Life Insurance on the life of the grantor(s). When the grantor(s) eventually die, the proceeds of the policy pay any estate taxes on other assets in the grantor(s) estate.

Instead of funding the trust with stocks and bonds, there are three reasons why many people will choose to have the trust own a life insurance policy instead.

  • First, it avoids the annual taxation of income-producing assets within the trust
  • Life insurance also provides peace of mind because of the instant death benefit
  • Life insurance is an excellent long-term wealth transfer vehicle

Whether you fund the policy with annual gifts or with one lump sum transfer this year, the policy will provide a guaranteed death benefit, which the trust will receive upon the death of the insured(s). The grantor(s) may also choose to buy life insurance on multiple generations, creating various points in time when tax-free income will be received by the trust.

Don’t forget that income taxes are due each year on any taxable income generated inside the trust. If too many corporate bonds or dividend paying stocks are used, that could become counterproductive to your wealth transfer goals. Using life insurance to fund the trust can help you eliminate this tax burden.

If you compare the net amount of money passed to your descendants through a properly established dynasty trust versus leaving them a  huge pool of money that gets taxed at each generation, the potential cost savings are exponential.

The dynasty trust dramatically increases the value of each generation’s inheritance by eliminating their exposure to estate taxes. This can amount to millions of dollars in potential tax savings for people funding their trust using the current lifetime exclusion.

If you include a life insurance policy within your dynasty trust, the amount passing to your heirs will be even greater.

How Is a Dynasty Trust Funded

Tips for Buying Life Insurance

There are three important points to remember when looking for survivorship life insurance coverage to for your dynasty trust.

Select a Quality Life Insurance Company

Typically, most life insurance companies apply more stringent financial underwriting to applicant’s seeking life insurance with larger death benefits.

Some insurance companies have special criteria for getting approved for a large life insurance policy  Many companies also do not sell survivorhhip or second to die life insurance policies.

If you are in need of a second-to-die life insurance policy, the insurance company you choose also needs to have solid financials.  Ratings agencies assist policyholders by assessing a grade based on the financial strength and claims paying ability of each insurance company.

Buy a Contractually Guaranteed Product

There are a number of different survivorship life insurance policies such as universal life, variable life, and whole life.

If you need affordable rates along with lifetime coverage, then we strongly recommend comparing survivorship life insurance using only contractually guaranteed premiums for your entire lifetime.

This is the only way to get an accurate comparison between competing companies. These guarantees are only found in whole life or  guaranteed universal life insurance (GUL) contracts.

Here is partial list of competitive and highly rated insurance companies currently offering contractually guaranteed survivorship life insurance:

Choose a Reputable Life Insurance Agent

The agent you chose to help you secure coverage is vital to getting approved with a solid company with affordable pricing.

Many agents do not routinely sell second-to-die policies and have not developed either the product knowledge or the carrier relationships needed to secure the best rate classification for their clients.

If you are looking into securing a second-to-die life insurance policy, it is very important to work with a financial planner who is familiar with dynasty trusts and comfortable handling larger survivorhip life insurance policies.

Our advisers often take many intricate steps to navigate the marketplace on your behalf to find you the most competitive offer.  We select the best carriers based on the details of your personal information, financial background, and medical history.

This will allow you to save you time an money when shopping for the best rates on survivorhip life insurance.  If you would like more information do not hesitate to call us 1-877-249-1358.

Eric Van Haaften, LUTCF is the president of Affordable Life USA. We are a nationally licensed life insurance agency focused on finding our clients custom planning solutions at excellent prices. 1-877-249-1358. eric@affordablelifeusa.com