Funds are very useful and flexible tools for holding assets. It allows for asset management during your lifetime, upon your disability, and ongoing asset management after your death. Perhaps you will continue to hold the assets in trust until your children reach an appropriate age to manage the money for themselves, such as the age of 25 or 30. But you can hold the assets in the trust for a longer period. You can keep the assets as a fiduciary for the lives of your children, children, etc.
These trusts, sometimes called “trusts,” will last for as long as the law allows. Some states have a “rule against eternity”. The rule in common law states that the asset must be owned, if it ever existed, no later than 21 years after the “life in existence” death when the trust became irrevocable, usually as the death of the trustee. In jurisdictions that are under the common law rule against eternity, you can have the assets in the trust, and then upon your death, you’ll look around and see who the “measure of life” is. The measure of life is usually the living beneficiaries of the trust, such as your children and grandchildren. The trust must be distributed within 21 years of the death of the last to die. Let’s say at your death that your grandson is 4 years old and lives to the age of 104NS Christmas. The trust can last up to 21 years after that. Therefore, the trust can last 121 years in this case.
Many states have adopted the uniform legal rule against perpetuity, which allows the trust to last either the period of the traditional rule against perpetuity (“life in existence” plus 21 years) or 90 years, if longer. Some countries have modified the rule so that the trust can last 150, 365, or even 1,000 years. Some countries have completely abolished the rule so that trust lasts forever!
Why would you want to keep your assets in fiduciary for a long time? First, you get professional asset management to make sure that the assets are not squandered by the beneficiaries and to ensure that the assets are distributed in the way you have chosen for a long time into the future.
After that, the Dynasty Trust can provide taxes to those who own taxable property. Let’s look at a quick example:
John (80) (1st generation) dies and leaves $5 million to daughter Sally (50) (2)second abbreviation Jill), candid. Sally lives another 30 years and that $5 million is growing 7.2%. $5 million turns into $15 million with Sally’s death. Sally was a wise investor and had taxable property in her own right even before she inherited from John. Therefore, inheritances from John and growth on her are taxed at the estate tax rate, which is currently 40%. Sally’s estate pays $6 million in estate tax on the money and Sally leaves the $9 million inheritance to her daughter Beth (third generation), who is also very smart about investments and has taxable property in her own right. Beth lives another 30 years and the $9 million she inherited from Sally triples to $27 million. Beth’s pays an estate tax of 40%, or $10.8 million. Leaves the inheritance house to Josh (4NS Jill), who likewise invests. Therefore, the $10.8 million he inherits grows to $32.4 million and his estate owes $12.96 million in tax, leaving $19.44 million for posterity. So, by the end of the fourth generation, John’s $5 million inheritance, after transfer taxes, had grown to $19.44 million in 90 years. That’s not bad, it almost quadrupled.
But there is a better way. If John (1st generation) at his death left $5 million to the Dynasty Trust for Sally (2nd generation) and her grandchildren and earmarked his GST exemption, the assets would not be included in Sally’s estate. Upon Sally’s death, the $15 million would not have faced a 40% reduction due to the estate tax. Alternatively, the full $15 million could have continued to grow for Beth (3rd generation) and her grandchildren. After another 30 years, it would have tripled to $45 million, and upon Beth’s death, it wouldn’t have been reduced but would have passed to Josh without more estate taxes. After another 30 years of wise investment by 4NS Jill, the inheritance could have grown to $135 million.
Without Dynasty Trust, assets increased 4x. However, with Dynasty Trust, assets have increased 27 times over the same time period and with the same investment assumptions. While the Dynasty Trust is not for everyone, it can have some transferable tax benefits for those with taxable property. Talk with a qualified estate planning attorney about your options.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128