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Wyoming Dynasty Trusts Utilizing Your Generation Skipping Exemption To Protect Your Wealth for Generations Most parents give their children their inheritances directly. Others think multigenerationally. Instead of giving their wealth to their children directly, they give it in “dynasty trusts” – trusts that benefit one generation of family members after another without being taxed in any family member’s estate. Wealth that is never taxed grows far more than wealth that is taxed at every generation, especially when that wealth is protected from creditors and failed marriages. Dynasty trusts are a golden opportunity for your family. By planning for children, grandchildren and even great-grandchildren, you can give you family many generations of tax-protected, creditor-protected, failed marriage protected wealth. The legislature of the State of Wyoming has had the foresight to pass a law that now allows a trust to last up to 1,000 years. This increases in the number of years a trust can last, allows the family or Trustee-rather than a state statute- to dictate how long a trust can last for future generations. A Tale of Two Families Let’s take a hypothetical family planning situation, which planning can be as different as night and day. The Knight Family. Nick Knight inherited $3,500,000 from his parents directly. His inheritance was titled in his own name. He owned it. The Day Family. David Day didn’t inherit his $3,500,000 from his parents. They left his $3,500,000 to a trust that named him as the trustee and beneficiary. David could control the $3,500,000 as the trustee and could enjoy the $3,500,000 as the beneficiary, but he did not own it. His trust did. You might think that Nick, who inherited his $3,500,000 directly, would be happier than David, who inherited his $3,500,000 in trust. But if the Knight family knew what the Day family knew, he would not be. If Nick could see the future, he would rather control and enjoy his wealth than own it. Let’s compare the Knight family’s future to the Day family’s future to see why: THE KNIGHT FAMILY ESTATE TAXES. The maximum estate tax rate for estates equaling, or in excess of, $3,500,000 is currently 45%. In the years 2007 through 2008, estates will continue to be taxed at a maximum rate of 45%. In the year 2010, the estate tax is repealed for one year; however, in 2011, the estate tax rate reverts to a high of 55%. Since the government taxes everything we own at death, Nick would pay estate taxes on his $3,500,000 because at his death he owns it outright. If his descendants inherit their wealth outright, the government will tax their wealth each time they pass it from one generation to the next because each generation will own what they inherit. Q: Assuming no investment growth, what will happen if everyone in the Knight family is in the 45% estate tax bracket? A: Nick’s $3,500,000 will shrink by 45% to $1,925,000 when it passes to his children, and it will shrink by 45% again to $1,058,750 when it passes to his grandchildren, and will shrink still further to $582,312 when it passes to his great-grandchildren. In three generations, over 83% of Nick’s wealth will be paid to the government, leaving less than 17% for Nick’s family. CREDITOR CLAIMS. To make matters worse, anything a member of the Knight family owns can be collected by lawsuit creditors. Lawsuits can wipe out inheritances long before estate taxes do. SPOUSAL CLAIMS. Other risks come from within the family. Unless each family member diligently keeps inherited property separate from marital property, a soon-to-be-ex-spouse can claim half of it in a divorce, adding financial loss to a family member’s personal one. THE DAY FAMILY CONTROL AND ENJOYMENT WITHOUT OWNERSHIP. Unlike Nick Knight, David Day’s $3,500,000 is owned by his dynasty trust, not by David. Even if David can spend all trust income, can enjoy the use of trust assets, and can control the trust as trustee, he will not be deemed to own the trust’s $3,500,000, if the trust’s provisions sufficiently limit his access to trust principal and his choice of future beneficiaries. Even the slightest limitations can be sufficient to cause trust assets to be owned by the trust rather than by David – limitations so slight that David will regard the trust’s assets as his own, even though they legally are not. In a dynasty trust, $3,500,000 remains $3,500,000 for generations. YOU CANNOT LOSE WHAT YOU DO NOT OWN. Being the beneficiary of a dynasty trust is like having a millionaire uncle who gives you everything you need, whenever you want it. Though your lifestyle reflects your uncle’s wealth, you are not wealthy. Your uncle is. If you lose a lawsuit or suffer a failed marriage, your judgment creditor or spouse cannot make claims against your uncle’s wealth. They are your creditors and spouses, not your uncle’s. When you die, the government cannot tax your uncle’s wealth in your estate because you never owned it. . THE GENERATION-SKIPPING TRANSFER TAX There’s a catch, of course. The estate-tax-free nature of dynasty trusts did not go unnoticed by Congress. In 1976, Congress enacted a 55% generation-skipping transfer tax that applies whenever dynasty trust assets pass to a new generation free of estate taxes. In 1986, Congress gave everyone a $1,000,000 exemption from this onerous tax. In 1997, Congress again blessed this exemption. Today, an individual can allocate up to $3,500,000 into a dynasty trust. This exemption mirrors the lifetime estate tax exemption. Under the current law, the exemption amounts are as follows until 2011: 2009 $3,500,000 2010 Unlimited 2011 $1,000,000 Most practitioners believe Congress will remedy this law in the near future, putting a reasonable ceiling on the GST exemption. Growing Your Exemption Trust Tax-Free. If your parents put $3,500,000 into a dynasty trust, it could grow to over $438 million as it passed through three generations of family members, all without paying estate taxes. All of this wealth would be exempt from taxation, not just the original $3,500,000. The $3,500,000 plus all its growth remains exempt both from estate taxes and from generation-skipping transfer taxes. This is why you would prefer to inherit your wealth in a dynasty trust. This is the Day family’s plan. If the Knight family were to invest the same $3,500,000, at the same rate of return, for three generations, they would have just over $40 million after paying estate taxes three times. After three generations, the Days will have almost eleven times as much as the Knight’s $40 million. TERM LIMITS The longer your dynasty trust lasts, the more generations of taxation it will escape. However, just as federal tax law limits the amount you put into your dynasty trust, state laws limit how long it can last. Most states have a “Rule Against Perpetuities” statute that limits the duration of dynasty trusts to between 90 and 120 years. However, because of the foresight in Wyoming, trusts governed under Wyoming law may be protected for up to 1000 years. THE CHOICE: DISTRIBUTION OR DYNASTY TRUST? Whenever your will, living trust, or irrevocable trust provides for an outright distribution of wealth to your heirs, consider distributing to a dynasty trust instead. You can include dynasty trust protections in any estate plan. They can be included in any will, living trust, or irrevocable trust. They always should be considered when you establish a life insurance trust to tax-proof your life insurance policies. You can generate many generations of tax-protected, creditor-protected, failed marriage protected wealth by making the right choice between outright distributions and dynasty trusts. They are as different as night and day. ____________________________ Footnote 1: DAY CALCULATIONS: At a 5% rate of growth, $3,500,000 would grow to over $438,337,526 in the years it would take for it to pass through four generations if we assume a 25-year age difference between generations. Footnote 2: KNIGHT CALCULATIONS: Using the same assumptions as for the Day family in the preceding footnote, $3,500,000 would grow to only $40,110,623 if 45% is paid as estate taxes when it passes to the next generation of family members in years 25, 50, 75 and 100.. |
GONNELLA & MAJORS, PC
Attorneys and Counselors at Law
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| Gonnella & Majors, PC ▪ 575 South Willow Street ▪ P.O. Box 1226 ▪ Jackson, WY ▪ 83001 Phone (307) 733-5890 ▪ Facsimile (307) 734-0544 ▪ www.wyomingestatelaw.com Disclaimer: Wyoming Rule of Professional Conduct 7.3(b), requires a notification that this is an advertisement. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisement or self– proclaimed expertise. |
Wyoming Dynasty Trusts