If you have significant assets and would like not only your children to benefit from your good fortune, but their children and even later descendants, you might consider including in your overall estate plan an Orange County dynasty trust.
A dynasty trust in Orange County protects assets for the benefit not just of the settlor’s children, but for the benefit of further generations. It can last for about 90 years. For that reason, people often call it a “generation-skipping trust,” although that is a bit of a misnomer. There is no requirement that the trust skip any generations at all. A dynasty trust is an effective vehicle that can:
- maximize the assets available for your children, their children and future generations,
- minimize the effect of transfer taxes, and
- protect the assets from your descendants’ outside obligations like creditor judgments or marital property settlements, and even their own wasteful or irresponsible habits.
Federal Estate and Gift Tax Treatment
Under our federal tax system, significant gifts are taxed when they are transferred from one generation to another, whether by gift or bequest. One of the most attractive attributes of the Orange County dynasty trust is its ability to reduce or eliminate estate and gift taxes.
Assets that you put into the trust, along with any income derived from those assets, are subject to federal estate or gift taxes only one time, when you transfer the assets into the Orange County dynasty trust. You won’t have to worry that they will be taxed again, even though your beneficiaries may stretch into multiple generations.
On the other hand, let’s say you give or bequeath a sizeable asset to your children without the benefit of a trust. In this case, that transfer would be subject to gift or estate taxes. Then, when your children pass that asset along to your grandchildren, that transfer would also be subject to gift or estate taxes.
Even if you tried to avoid the effect of the gift or estate tax by giving the asset to your grandchildren, it might still be necessary to pay the federal generation-skipping transfer tax. A well-crafted Orange County dynasty trust will eliminate those tax events.
Here’s an Example
You decide to provide for your son in your will by giving him $15 million. The maximum exemption in 2017 for estate tax purposes is $5.49 million per individual. Therefore, the gift would likely be subject to estate tax. Over his lifetime, the asset doubles in value. When he wills the $20 million to his daughter, that bequest would also be taxed. The top tier tax rate for such a gift was 40% in 2016. If a similar tax rate is in effect at the time of his death, the potential tax would be $8,000,000.
Let’s say instead, you set up an Orange County dynasty trust. That $15 million would be taxed at the time the trust was set up, but that would be the last time. Your grandchildren would enjoy the benefit of the trust without the concern that an estate tax would apply.
It is also not necessary that your children be the first beneficiaries of the trust. Often, children are the first beneficiaries, followed by your grandchildren, and again by your great-grandchildren. But you could just as easily choose your grandchildren to be the first in line.
Another benefit to the beneficiaries is the spendthrift nature of the Orange County dynasty trust. In its terms, you can limit the ability of non-beneficiaries to gain access to the trust assets. Therefore, the assets of the trust could not be subject to attachment by a judgment creditor or transferred to a spouse in a divorce unless and until the assets were distributed to the beneficiary and no longer subject to the restricted terms of the trust.
Limitations on the Trust
The income from the dynasty trust is still taxable. For that reason, many grantors choose to put non-income producing assets in the trust. These could include tax-free municipal bonds, stocks not expected to pay dividends. You can also treat a dynasty trust as an irrevocable life insurance trust by using some of your contributions to the trust to purchase a life insurance policy. The benefits will become trust principal upon your death.
As the settlor of the trust, you have a lot of flexibility in:
- how you set it up
- what you put into it
- who your beneficiaries will be
- how you distribute the assets and the income from the assets
You can bestow on the trustee the power to make decisions on the management of distribution of the assets and income. But the trust itself is irrevocable. This means that once you set up the trust and transfer assets into the trust, you cannot change your mind. Therefore, you must be careful to ensure that the property you use to fund an Orange County trust will not be an asset that you may need during your lifetime. Neither can your beneficiaries alter the terms of the trust even if their circumstances and needs evolve over time. In some ways, using a dynasty trust will require you to look into your future to anticipate not only your needs but the needs of unborn generations well down the line.
Choice of Trustee
You should also give careful consideration to your choice of trustee. Because of the potential length of the trust, most settlors will choose a bank or trust company because of its stability and capacity to last at least the duration of the trust. You can, however, choose an individual, or even one of the beneficiaries to serve as trustee, with appropriate terms that would limit the beneficiary/trustee’s access to the trust assets.
Flexibility of the Trust
A dynasty trust is a remarkably flexible instrument. For instance:
- You can set the terms of the trust to be as specific as you want. Or you can choose to make them relatively nonspecific giving the trustee broad discretion in decisions concerning distributions.
- You can give some control to the beneficiaries to will or give away some portion of their shares of the trust to others outside the line of succession.
- Also, you can set different terms for different beneficiaries. For instance, you can provide that the court give your grandson Charles control of some portion of his share when he graduates from college. However, your impetuous granddaughter Margaret will not gain control until she can demonstrate that she can handle money responsibly in the eyes of the trustee.
- You can choose to fund the trust during your lifetime or upon your death.
Contact an Orange County Dynasty Trust Attorney
An Orange County dynasty trust is an extremely useful tool in protecting your assets for the benefit of future generations. However, it is also a complicated device with options that you must carefully consider. That way it will accomplish its intent while reducing or eliminating significant tax consequences. For more information about an Orange County dynasty trust, contact the Legacy Lawyers at 714-252-6075.