Why You Need a Dynasty Trust . . . Even If You’re Not Ultra-Wealthy
Dynasty Trust Planning . . . It’s Not Just for the Rich
When you hear the term “Dynasty Trust” you may naturally think of ultra-wealthy families, such as the Carringtons from the 1980’s prime time soap opera Dynasty. And yes, they do benefit families like the Carringtons. But Dynasty Trusts provide several benefits for those that are not ultra-wealthy as well. What is a Dynasty Trust and why does your estate plan need it?
What is a Dynasty Trust?
A Dynasty Trust is simply a Trust that lasts more than one generation. In other words, you create a Trust that lasts for the rest of your life, the rest of your children’s lives and the rest of your grandchildren’s lives. Conversely, most revocable living trusts simply distribute to your children upon your death. Why do we care? There are at least three reasons to set up a Dynasty Trust instead of distributing assets outright to your children (wealthy or not).
Reason #1: Dynasty Trusts Provide Asset Protection
Would you want your assets to be given to your children’s creditors (e.g. from bankruptcy, lawsuits, personal guarantees, etc.) upon your death? Of course, not. But most revocable living trusts would require exactly that and provide no asset protection. However, with a Dynasty Trust, those assets are not subject to attachment by your children’s creditors. Furthermore, it could still be used for your children’s benefit even when those creditors are looming.
Reason #2: Dynasty Trusts Protect Your Children From Their Spouses
Everyone has heard the statistic that more than 50% of marriages end in divorce. If your child went through a divorce, would you want your assets to be given to your child’s ex-spouse? A Dynasty Trust allows your assets to be held in a separate trust from your child’s marital assets, which protects those assets from being allocated to your child’s spouse in a divorce. Instead, those assets could be kept for the benefit of your child and/or your grandchildren.
Reason #3: Dynasty Trusts Can Eliminate Future Estate Taxes
Traditionally, wealthy clients would use Dynasty Trusts to avoid estate taxes for future generations. Dynasty Trusts allow you to pass assets to the next generation without those assets being includable in your child’s estate, therefore eliminating those assets from being taxed again in the future. However, the estate tax limits are constantly changing. While a $10 million estate will not be taxed in 2019, a $1 million estate may be taxed in 2020. What is certain is that you do not want to be on the wrong side of estate taxes in the future. Dynasty Trusts will help your family eliminate estate taxes or minimize the damage.
Simplicity of Dynasty Trusts
So what’s the catch? There really isn’t one. The Trust can be drafted to provide your children with significant discretion and power over the Trust while still providing the protections identified above. There are some basic administrative tasks which must be followed, such as filing an annual tax return for any income generated and following basic trust administration guidelines. Conceptually, a Dynasty Trust is relatively simple to understand. However, creating a Dynasty Trust does require carefully drafted provisions to avoid several potential pitfalls. We often see these pitfalls in estate plans drafted by attorneys that are not estate planning specialists.
Adding a Dynasty Trust to Your Estate Plan
Whether you already have an estate plan, or looking to create one for the first time, Newport Beach Estate Planning Attorney, John L. Wong can assist you with adding a Dynasty Trust to your Estate Plan.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
