In some cases, trusts are used on a short-term basis to pass money directly to a beneficiary. For instance, someone may set up an educational trust. They name a beneficiary who is allowed to use the money in the fund to pay for college tuition and related costs. Once they have completed their education, they gain access to any remaining funds to use as they see fit.
But this type of plan ends with your children. You may be looking for a more long-term solution. A dynasty trust can last for generations, providing assets to grandchildren and beyond. It does not stop with the next generation, but can be an excellent way to create financial stability and leave a legacy that impacts multiple generations for years to come.
Avoiding federal transfer taxes
One potential benefit of using a dynasty trust is that it typically does not incur federal transfer taxes. For instance, when you give gifts to specific individuals, if they cross a certain threshold, a gift tax may be imposed. You may also be concerned about estate taxes or the generation-skipping transfer tax.
But with a dynasty trust, if it has been set up correctly, the funds are not depleted by these types of taxes. This keeps more of the money in your family for a longer period of time, which is what makes it such an effective option when you are planning for multiple generations.
Other types of asset protection
Additionally, if you place money into a dynasty trust, it is typically protected from other financial issues, such as divorce settlements or creditor claims. This can help ensure that the money stays within your family, rather than being diverted elsewhere.
For example, one of your grandchildren may get divorced in the future and be required to divide marital assets with a former spouse. While other assets may be subject to property division, assets held in the dynasty trust are generally untouched. This means the money stays with your grandchild, and you do not have to worry about unintentionally passing an inheritance to someone who is no longer even part of your family.
You may also be concerned about future generations developing poor spending habits, filing for bankruptcy or facing significant creditor claims. While that individual’s personal assets may be available to creditors, the money placed in a properly structured dynasty trust is not part of those settlements. As a result, you do not have to worry about the trust funds being used to pay off outstanding credit card debt or similar obligations. The money remains in the trust and continues to be passed down through your family.
Setting up a dynasty trust
To obtain these types of protections, it is very important to set up your estate plan correctly and establish the dynasty trust in compliance with modern estate planning laws. It can be helpful to work with an estate planning attorney who has experience with these trusts and can guide the process to help ensure everything is handled properly.