Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Monday, April 23, 2012

Advantages of Generation-skipping Trusts

UnknownGeneration-skipping trusts are also known as dynasty trusts. These long-term trusts are designed to avoid estate taxes when one generation transfers wealth to the next generation.

Over four generations, estate tax savings could add up to 70%. A grantor can set up a dynasty trust during lifetime using the grantor’s annual gift tax exclusion and/or $5 million gift tax exemption. Dynasty trusts can also be created at death with the grantor’s estate tax exemption. When the beneficiaries die, the assets in the trust pass to the next generation free of estate and gift tax. Individuals can leverage their GST tax exemption with life insurance too.

Typically, a separate dynasty trust is created for each of the grantor’s children. During the lifetime of the child, the income and principal can be used for health, education, maintenance and support of the child. When the child dies, the assets will pas to his/her children in equal trust shares and the scenario will repeat itself for as long as the applicable state laws will allow.

You can build flexibility into the trust with a limited power of appointment provision, which could allow a preferred beneficiary to rewrite the terms of the trust to a certain extent.

Beyond tax advantages, dynasty trusts can ensure that beneficiaries are protected from their inabilities, or disabilities, that the trust assets will never be outside the reach of the grantor’s lineal descendants, and that property is professionally managed.

See Julius Giamarco, Generation-skipping Trusts, Producer’s Web, Apr. 11, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

https://lawprofessors.typepad.com/trusts_estates_prof/2012/04/advantages-of-generation-skipping-trusts.html

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