By Lynn Evans
Among the several truisms we embrace at Solidarity Wealth is that each family and their aspirations are as unique as Utah snowflakes, and crafting a well-designed estate and legacy plan requires a careful, thoughtful approach to be effective and successful.
For successful families seeking to preserve and extend their wealth into the future, a family dynasty trust may be a solution to pass down a lasting legacy that upholds core family values, fosters philanthropic endeavors, and streamlines wealth transfers. These trusts may also help families avoid common issues that can occur with sudden inherited wealth.
Let’s review the basics of dynasty trusts, their pros and cons, and how they might help you realize your estate planning and legacy goals.
What Are Dynasty Trusts and How Do They Work?
Dynasty trusts are essentially irrevocable trusts that receive and hold assets outside one’s own estate, designed to transfer and preserve a family’s wealth from one generation to the next while avoiding applicable estate taxes and generation-skipping transfer taxes. These types of trusts became more valuable and therefore more popular in the wake of more than 30 states that have either repealed or relaxed their laws against perpetuities—rules that aim to limit multigenerational shelters of wealth. Utah, for example, amended its statute in 2003 to allow assets to remain in trust for up to 1,000 years.
In a Dynasty trust, the grantor establishes the rules for the trust, including how the assets will be managed and distributed to the beneficiaries, in accordance with their needs and the grantor’s wishes. Once assets have been transferred to the trust, the grantor gives up control over the trust assets and generally cannot alter the terms or beneficiaries of the trust. Instead, the trust is administered by the named trustee(s) in accordance with the trust provisions. The trustee can either be a named individual, a bank, or another financial institution.
Advantages of Dynasty Trusts
For families with multi-generational wealth, Dynasty trusts may offer numerous advantages over traditional estate plans, such as outright distribution to heirs at death, or even over trusts that distribute assets to beneficiaries upon reaching specified ages. These advantages include:
Tax Savings
Although the federal estate tax exemption was permanently set at $15 million this past July (indexed in future years for inflation), families with substantial wealth are still at risk of their assets being reduced by the 40% federal estate tax, imposed at each generation. Because assets contributed into a Dynasty trust take advantage of the current exemptions and are not subject to estate or generation-skipping tax for the duration of the trust. Additionally, families can take advantage of other planning techniques, such as valuation discounts or a gift combined with a sale of assets to the trust, to further increase the tax savings.
Protection From Creditors and Poor Decisions by Beneficiaries
Assets within these trusts are held for the benefit of the beneficiaries, but the beneficiaries cannot control the management or distribution of trust assets. The trustee alone has this control as specified by the trust and may deny distribution requests that are not in conformance with those dispositive provisions.
This creates a powerful defense of the assets against claims by creditors, ex-spouses of beneficiaries, or the beneficiaries themselves in the event of poor lifestyle decisions or an inability to manage their finances prudently, thereby preventing trust funds from being squandered.
Legacy Planning and Preserving Family Values
Since the grantor establishes the rules and how the assets will be managed, dynasty trusts offer the ability to pass on important family values. These include practicing compassion and engaging in regular philanthropic endeavors and charitable giving, encouraging a strong work ethic, and avoiding the feelings of entitlement that often accompany inherited wealth. Including beneficiaries in discussions about the trust may help educate them about the trust provisions and the family mission statement, as well as how to manage money and apply prudent financial principles that can benefit them in all areas of their life.
Disadvantages of Dynasty Trusts
There are few, if any, estate planning strategies that can serve every situation. Drawbacks to a dynasty trust may include:
- Adverse effects on family relationships: It is important for the grantor to have meaningful discussions with beneficiaries about the trust during his or her lifetime. All too often, beneficiaries are excluded from discussions about a grantor’s intentions and only learn about their inheritance and its terms and conditions after the grantor has passed. When beneficiaries first learn of the values and principles encouraged by the grantor, as terms expressed in the trust, they often feel that these are being imposed on them from the grantor’s grave. They may also experience resentment over implications that they were not deemed reliable or competent enough to manage their inheritance on their own. This may also result in attempts by beneficiaries to unwind the grantor’s careful planning through legal challenges to the trust’s creation or provisions.
- Lack of flexibility: Once the trust is executed and funded with assets, the trust provisions may not be changed. This can lead to complications in the future regarding management, distributions, or the longevity of the trust assets if the rules are too rigid and don’t allow for unanticipated contingencies. A balance of control and flexibility is often a good idea, depending upon the grantor’s and family’s needs and objectives.
- Poor trustee relationships or failure of the trustees: Given the lifelong nature of a family dynasty trust and its underlying purpose, selecting a trustee requires extreme care. In the case of corporate trustees such as banks or financial institutions, it is vital to understand how important decisions regarding the trust are made. The relationship between the trustee and beneficiaries is expected to last a lifetime. Encouraging open communication and mutual respect between these parties is also critical. Allowing the beneficiaries the ability to replace the trustee under certain circumstances may be advisable as a solution to problems later on.
In summary, dynasty trusts can be an effective tool for preserving family wealth across generations, offering numerous tax, estate, and legacy planning advantages. Careful planning and consideration are essential for the success of family dynasty trusts due to their unique and inflexible nature once established. This includes assembling a skilled planning team of qualified and experienced attorneys, tax professionals, and wealth advisors.
Planning Your Legacy for Future Generations? Talk With Us First.
At Solidarity Wealth, we specialize in helping high-earning individuals and families build and pass on multigenerational wealth in the most tax-efficient manner, while maintaining the financial flexibility they need to capitalize on opportunities as they arise. If you’re looking for a tailored investment and estate planning strategy that aligns with your goals, we’d love to help.
Let’s have a conversation. Reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
About Lynn
Lynn Evans is the Director of Family Office Services and a Tax Advisor at Solidarity Wealth. He advises some of the Mountain West’s most successful families, technology entrepreneurs, and executives on complex individual, fiduciary, and business income tax matters, estate and gift tax planning, and fiduciary administration.
Prior to joining Solidarity Wealth, Lynn served as a senior trust advisor at a large national private bank and as a senior tax manager for a large international CPA firm, specializing in complex tax issues for individuals, businesses, trusts, and estates.
Lynn holds a Bachelor of Arts in Accounting and a Master of Accountancy with an emphasis in tax from the University of Utah, as well as a Juris Doctor with a focus in Business Law and Estate Planning from Albany Law School. He is an active member of the Salt Lake Estate Planning Council and the American Bar Association, where he continues to engage with and contribute to the wealth management community. Outside of work, Lynn enjoys spending quality time with his wife and four children. A dedicated outdoorsman, he loves hiking, camping, and skiing, and is always eager to hone his home improvement skills or attend music performances and sporting events. To learn more about Lynn, connect with him on LinkedIn.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.
