Dynasty Trust Estate Tax Savings

It is true that substantial estate tax savings can be created by Dynasty provisions in your Family Savings Trust. As we have discussed, the federal estate tax is normally imposed as wealth that is transferred from parents to children. Each time the wealth is passed to a younger generation a new estate tax is levied. At a 50 percent tax rate, one dollar in wealth is reduced to 50 cents when it is passed to your children. The remaining 50 cents is further taxed so that your grandchildren would receive only 25 cents of the original dollar, and so on until there is nothing much left. For those whose total assets are under the estate tax threshold (currently scheduled at $1 million for 2011), this is not a problem since amounts under the exemption are not subject to federal estate tax. Those who have accumulated assets in excess of the exemption amount or who have large insurance policies and wish to maximize and preserve these funds for future generations can significantly reduce estate taxes with properly structured Dynasty features.

The provisions in the tax law which allow these benefits are long standing and well established. Briefly stated, if assets are left to children or any younger generation and the beneficiary’s rights to the property are limited by certain defined standards, the trust property is not subject to estate tax as it passes to a younger generation of beneficiaries. For example, if you leave $1 million in a trust for your child, and he or she has the right to the income from the trust and also a right to principal for “health, education, maintenance, and support,” the trust assets will not be included in your child’s estate on death and can then pass to your grandchildren free of estate taxes. The trust can continue, subject to these same provisions, and there will never be an estate tax imposed as it passes from children to grandchildren and further down the line. Depending on the amount of trust assets and whether income is accumulated or distributed, wealth which is not subject to estate tax can be maintained or compounded over time as succeeding generations of family members become beneficiaries. (As with the estate tax itself, the total amount which can be passed through the generations is subject to a generation-skipping tax on amounts in excess of an exemption amount that has yet to be determined by Congress. Stand by for future developments.)


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