Plan Now for Dynasty Trusts

For years now wealthy people have used dynasty trusts to shield their assets from estate taxes for tens and hundreds of years, or even forever. But the dynasty trust is under attack from a new proposed legislation in President Obama’s budget. The proposal would limit tax-free dynasty trusts to a maximum of ninety years. While experts say the proposal has little to no chance of passing this year, the fact that its shown up is reason enough for families seeking to transfer wealth to act quickly on establishing dynasty trusts as the proposal will not likely be retroactive.

Besides the short time span before a proposal limiting the effectiveness of the dynasty trust is signed, several positive reasons exist for establishing such a fund. The dynasty trust contains a generous terms on the state and gift tax—a $5 million individual exemption and a top 35% rate (both of which will expire after 2012).

Since a tax overhaul in 1986, many people have begun using dynasty taxes to transfer funds without penalty. For example, a man who wishes to leave money to his children, grandchildren, and great grandchildren would leave the money in a Dynasty Trust to his children and the trust would be rolled on to the next generation without estate taxes until it reached its final recipient. Without using a Dynasty Trust, each generation would amass an estate tax to be paid. Rather than losing wealth on taxes, this man could place his entire estate into a Dynasty Trust and avoid the many layers of taxes. In essence, heirs don’t have to spend their inheritance on estate taxes.

The Obama administration proposal would remove the federal estate tax exemption after ninety years so the trust can go on indefinitely but the tax exemption cannot. Because allowing such a trust affects many current state tax laws, only the following states allow dynasty trusts: Alaska, Delaware, District of Columbia, Idaho, Illinois, Kentucky, Maine, Maryland, Michigan, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Wisconsin, and Wyoming.

The unified, lifetime federal gift and estate tax exemption in calendar year 2012 is set at $5.12 million. The federal lifetime exemption for the generation-skipping transfer tax (GSTT) is also $5.12 million in 2012. These are the highest exemption amounts in decades. In 2013, these exemptions are scheduled to go back down to $1 million, and the maximum estate and GST tax rates will increase from 35 percent to 55 percent. Calendar year 2012 might be the last opportunity for individual United States taxpayers to move millions of dollars into an irrevocable dynasty trust without incurring punitive gift taxes, and to ensure that future generations of trust beneficiaries receive benefits free of GST taxes. Given current and projected political and fiscal conditions, exemptions for the gift tax and GSTT will probably not be this favorable again for a long time.

Our law office has been preparing many Dynasty Trusts for client this year because of the possible changes in  the law next year. Let us help you plan for your family’s future.

Patel Law Offices offers a strategy session to discuss how to resolve your legal problem. Conveniently schedule online today with our online scheduler and questionnaire.