The term ?dynasty? is typically associated with ultra-wealthy families, like the Rockefellers or the Kennedys. But you don't have to be in the same league as a Rockefeller or a Kennedy to benefit from a dynasty trust.
A dynasty trust can be a tax-friendly way even for those with moderate wealth to provide financial security for their children, their grandchildren and even their great-grandchildren. That's assuming the trust documents are drafted properly, so be certain to retain an attorney who is familiar with dynasty trusts, and who understands income and estate tax laws. Failure to do so could result in adverse tax treatment of trust proceeds.
A dynasty trust is a type of Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust that owns life insurance. Annual contributions by the person who sets up the trust (the ?grantor?) are used to fund a life insurance policy. Since it is irrevocable, an ILIT cannot be changed in any way once it is created.
The reason for creating an ILIT is that, if it is designed properly, trust assets are not included in the taxable estate of the grantor, and the death benefit is generally not subject to income or estate taxes. Note that there are exceptions, so be certain to consult your tax advisor.
The difference between a dynasty trust and any other ILIT is that the dynasty trust uses each grantor's generation-skipping transfer tax (GSTT) exemption as a way to continue the trust for generations, while remaining outside of the beneficiaries? taxable estate. In some states the trust can be set up to continue in perpetuity, which means it can virtually last forever.
The generation-skipping transfer tax (GSTT) is a flat tax imposed on all transfers that skip a generation. A transfer of assets from a grandparent to a grandchild may be subject to the tax, but a transfer from a parent to a child will not.
The lifetime GSTT exemption is $1,500,000 for 2005. It is scheduled to increase to $2,000,000 in 2006 and to $3,500,000 in 2009. However, unless Congress takes action, it will fall back to $1,060,000 in 2011.
Purchasing life insurance in a trust leverages the exemption, since the exemption will be based on the premiums, not on the death benefit or the cash value of the insurance. Total premiums cannot exceed the grantors? available GSTT exemptions.
Setting Up A Dynasty Trust
The dynasty trust is set up so that one or more grantors can allocate their GSTT exemption to gifts made to the trust. This requires the grantors to note the gifts on a federal gift tax return.
The trustee, who is in charge of distributing assets from the trust, uses the gifted funds to purchase life insurance. The insurance policy may be a single life policy on the life of a sole grantor or a survivorship policy on the lives of a husband and wife as joint grantors. Joint grantors can use separate exemptions, which this year would total $3,000,000.
As long as the GSTT exemption covers all of the lifetime gifts made to the trust, all trust assets, including the death benefit from the life insurance, will be exempt from generation-skipping transfer taxes. If the ILIT is properly drafted and administered, the death benefit proceeds should also be free from income and estate taxes.
Trust asserts may be held for multiple generations, which restricts direct access for future generations.
The dynasty trust may be the only way to reduce taxes not only for yourself and your children, but for future generations.
NOTE: This list should be consulted, based on where the article is published. Twenty-two states have abolished the Rule against Perpetuities and trusts can either have unlimited duration or last for a longer term of years. These states currently include Alaska, Arizona, Colorado, Delaware, Idaho, Illinois, Maine, Maryland, Missouri, Nebraska, New Hampshire, New Jersey, Ohio, Rhode Island, South Dakota, Virginia, Washington D.C., Wisconsin, Wyoming (trusts can last for 1000 years), Utah (1000 years), Florida (360 years), and Washington (150 years).
This material is for informational purposes only. Although many of the topics presented may involve tax, legal, accounting or other issues, neither John Hancock Life Insurance Company and its affiliated companies, nor any of its agents, employees, or registered representatives are in the business of offering such advice. Individual interested in these topics should consult with their own professional advisors to examine tax, legal, accounting or financial planning aspects of these topics.
Securities offered through Signator Investors, Inc. SEIA and investment advisory services are offered independent of John Hancock Life Insurance and Signator Investors, Inc. and any subsidiaries or affiliates.
