What is a Dynasty Trust?
A dynasty trust, also often referred to as a perpetual or generation-skipping transfer (“GST”) trust, is a unique type of irrevocable trust that has become a very powerful estate planning tool in preserving family wealth. Dynasty trusts can prevent your assets from being included in your or your descendants’ estates, while enabling the assets to pass to future generations without being taxed at every step. Indeed, if set up properly, the assets placed within the dynasty trust can be exempt from estate tax, GST tax, and gift tax for generations while the trust is in existence.
Nevada’s 365-Year Dynasty Trust:
On June 6, 2005, the Governor of Nevada signed into law Senate Bill 64. This bill, which became effective October 1, 2005, extended Nevada’s rule against perpetuities to 365 years. Accordingly, the bill, codified at NRS 111.1031, enables a Nevada dynasty trust to exist for up to 365 years. On account of both the passage of Senate Bill 64 and a lack of state income tax, Nevada is a leading dynasty trust jurisdiction for Nevada residents and non-residents alike.
Leveraging Tax Exemptions:
The GST tax is generally assessed on assets that pass to a beneficiary who is two or more generations below the transferor (for instance, a transfer to your grandchildren or future generations). Nevertheless, by allocating your GST tax exemption ($5 million in 2011, or $10 million per couple) to the dynasty trust, trust distributions can be made without being subject to the GST tax during the life of the trust. Indeed, a key aspect of dynasty trusts is that they are set up to fully leverage your GST tax exemption.
In addition to the GST tax, the dynasty trust can also leverage the gift tax and estate tax exemption. For instance, while transfers into the dynasty trust will be subject to the gift tax, you can allocate your lifetime gift tax exemption ($5 million in 2011, or $10 million per couple) to trust contributions. By doing so, you will be able to make a tax-free lifetime gift to the dynasty trust of up to $5 million (in 2011, or $10 million for couples).
In addition to leveraging tax exemptions, dynasty trusts can also be advantageous by providing asset protection. Since the assets are held in trust and do not pass directly to any beneficiaries, the assets in a Nevada dynasty trust can be protected from creditors, ex-spouses, and uncontrolled spending for 365 years.
While the dynasty trust can provide asset protection, it also allows the assets to grow free from transfer taxes. Because the appreciation of assets in the dynasty trust will generally be exempt from estate taxes, it can be helpful to fund the trust with the type of assets that could grow considerably, such as stocks or life insurance policies.