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Articles: Creating  your own dynasty  trust

Even if you are not Warren Buffett or Bill Gates, you may have amassed a sizeable nest egg during your working career.  Now the trick is to transfer some of your wealth to the younger generations with the minimum amount of estateand gift-tax erosion.  This requires some knowledge of the prevailing laws.

First, the federal estate-tax exemption can help protect your assets.  For 2012, the exemption effectively shelters up to
$5.12 million (up from $5 million in 2011) from estate tax, not even counting amounts passed to your spouse under the marital deduction.  The exemption is currently “portable” between married couples. Also, the tax law imposes a generation-skipping tax (GST) on most transfers that leapfrog a generation, but it allows a generous exemption equivalent to the estate-tax exemption. Caveat: The exemption amounts are scheduled to decline to $1 million in 2013.

To complement these tax breaks, one technique that may be used by affluent families is the “dynasty trust.”

How it works:   Depending on the terms of the trust, the income is accumulated or is paid out on behalf of the trust’s beneficiaries children, grandchildren and possibly even more remote decendants.  The trustee may also have dis cretion to invade principal in certain circumstances.

As long as the assets remain in the trust, they do not become part of a beneficiary’s taxable estate when he or she dies.  So the wealth in the trust compounds without any current tax over three generations or more.

Be aware, however, that state law may have an impact in this area.  Discuss your personal situation with an estate planning expert.

There are other reasons besides taxes for establishing a dynasty trust. Since the assets are controlled by the trustee, the trust beneficiaries cannot embark on any wild spending sprees. Also, creditors including a spouse in a divorce proceeding cannot reach the trust assets. Typically, a dynasty trust is set up during the grantor’s lifetime (known as an “intervivos trust”).   However, it can also be established through a will as part of an overall estate plan.

Note that a business owner might contribute a portion of his or her business interest to a dynasty trust.  If the business remains successful, all of its value and future appreciation is shifted to the children and grandchildren free of estate tax. The business interest may be supplemented by transfers of cash securities, real estate or other assets.   Finally, a dynasty trust may be set up with “strings attached” to reflect the grantor’s personal preferences and desires.

Dynasty trusts have been mentioned in tax reform discussions.  However, at least at this writing, they remain intact.

 In summary: A dynasty trust is appropriate in certain cir cumstances.  But this is not a do-it-yourself proposition. Obtain assistance from a knowledgeable professional.

This newsletter/advertisement is produced for our clients, friends and associates through an arrangement with WPI Communications, Inc. for the representatives’ use. Although the editorial content is professionally researched, written and edited, neither our firm nor any of its agents, representatives or associates make any representations regarding the accuracy of the content or its applicability to your situation. The information in this communication is not intended as tax or legal advice. In accordance with IRS Circular 230, the information provided herein may not be relied on for purposes of avoiding any federal tax penalties. Any tax advice contained in the body of this material was not intended or written to be used, and cannot be used, by the recipient for the purpose of 1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or 2) promoting, marketing or recommending to another party any transaction or matter addressed herein. You are encouraged to seek tax or legal advice from an independent advisor.


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