Making a gift through a trust to a younger family member is often a wiser way to go than to gift assets outright. There are numerous advantages, including protection of the asset, tax planning and being able to maintain control, until the beneficiary is deemed mature enough to have access to the asset.
For multi-generational families with significant wealth, the use of a dynasty trust is a good strategy to extend wealth one generation below that of the grantor, says Forbes in the recent article “2 Reasons To Consider A Dynasty Trust.”
Generation-Skipping Transfer Tax (GST) Exemption. According to the American Bar Association, the GST tax is imposed on asset transfers to grandchildren and more remote descendants that exceed the exemption limits. As a result, the transferor can’t avoid transfer taxes by "skipping" a generation. The GST is imposed, in addition to gift and estate taxes.
A person can give up to $11.4 million in assets (the GST tax-exempt amount) to a trust in 2019. Trust assets are protected from transfer taxation for as long as the trust document and state law permit it. A dynasty trust uses the federal GST tax exemption by taking family wealth out of the transfer tax system for as long as the trust is in existence; income and principal is used to benefit each succeeding generation.
An additional benefit is that the GST tax exemption can often be extended, by transferring assets subject to valuation discounts.
Grantor Trusts Provide More Tax Benefits. In most cases, grantor trusts treat the trust creator as the owner of the trust assets for income tax purposes. This allows the trust principal to grow free of income tax. Creating the trust as a grantor trust adds another level of tax benefit to a dynasty trust.
The estate planning benefits of the asset transfer are increased by the grantor making the income tax payments instead of the trust. In other words, the assets in the trust aren’t reduced by income taxes. Any income taxes paid by the grantor reduce the size of the grantor’s overall taxable estate, when calculating estate taxes.
An experienced estate planning attorney, who routinely represents high net-worth families, should work alongside family members and other advisors to ensure that the family’s wealth continues to be managed and taxes be minimized over multiple generations.
Reference: Forbes (July 23, 2019) “2 Reasons To Consider A Dynasty Trust”