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What is a Dynasty Trust?

A Dynasty Trust or Generation-Skipping Trust (“GST Exempt Trust”) is intended to provide estate tax protection for your child and creditor protection during the child’s lifetime.

The federal estate tax system is designed so that each generation will pay an estate tax on assets accumulated during life and on those assets inherited from parents. A Dynasty Trust or GST Exempt Trust can be used to avoid the imposition of a second estate tax on inherited assets at your child’s death. Instead of receiving the inheritance outright at your death, the child will be the beneficiary of the GST Exempt Trust. Your child will have the benefit of the inherited assets, income and principal for support, without having those assets, including growth, taxed at the child’s death. In many cases being the beneficiary of a trust is better than outright ownership. In addition to the tax savings, a properly structured trust will protect the beneficiary from the claims of creditors, including former spouses. Your child may act as the Trustee with the ability to invest and manage the assets. The amount you may place in a Dynasty Trust is limited to the generation-skipping tax exemption ($5,250,000 in 2013). This technique is especially useful when adult children have accumulated assets of their own and are concerned about the impact of additional taxes.

The terms and benefits of a Dynasty or GST Exempt Trust:

  • Your child can receive all of the income of the trust or it can be kept in the trust for growth.
  • Principal may be distributed for the support of the child and his or her descendants.
  • Your child can act as the sole Trustee and have the right to manage the assets and decide on the distributions from the trust.
  • Your child may have the power to appoint successor Trustees.
  • Your child can have power to direct who receives the trust at his or her death.
  • The trust can continue for as many generations as desired by you as the grantor or terminate at child's death.
  • The trust is not included in child's estate for estate tax purposes and passes completely estate tax free at the child’s death, including the growth in the value of the trust.
  • The trust provides creditor protection from the creditors of your child, including divorced spouses.
  • The trust can be used by a parent with a modest estate when the child has a large taxable estate.