One of the keys when thinking in terms of Estate Planning is to think long term, i.e. multi-generation. With estate tax assessed against an estate at the passing of EACH generation, $15,000,000 today will atrophy to just a fraction of that amount within a few generations given that estate taxes approach a whopping 40% tax rate.
So is there a solution? Yes, and the answer comes in the form of a Dynasty Trust. This is an irrevocable trust specifically designed to go into perpetuity-or as close to that as state law allows. A Dynasty Trust is by design a multi-generational trust. And that design allows for its assets to pass on to many generations without estate tax.
Years ago, large sums of wealth were transferred not to the next generation but to the so called “skip generation’, the grandchildren. These assets were passed without tax. Naturally, this activity did not go unnoticed. So, the IRS now assesses a “generation skipping tax” (GST) for such transfers and this tax rate mirrors the lofty estate tax rate. Tax law does allow a generation skipping gift of $5,600,000 and the annual gift limit is $15,000. But beyond that amount, the GST tax is assessed.
There is a strategy often used to further increase this GST amount, however, to pass on far more than the initial GST gift amount allowed. This involves using life insurance inside the Dynasty Trust. By implementing this strategy, the donors will not only see immediate and significant leverage on their gifted assets via the insurance death benefit, but the assets can now pass with a step up in basis as well as accumulate in a tax deferred manner inside the insurance policy. This strategy also produces very attractive internal rates of return, often times in the 7.00-9.00% range at life expectancy. There is potential to provide a guaranteed death benefit as well locking in these attractive IRR’s.
Dynasty Trust planning is often an essential part of a Wealth Transfer Plan. The benefits of providing a means to minimize estate taxes & GST taxes, protect trust assets from creditors and to leverage the GST assets makes Dynasty Trusts an exceptional planning tool.