Use A Dynasty Trust to Protect Your Wealth

Using an irrevocable trust ensures a far smoother transition of assets than a will, and also offers significant tax savings and far more privacy, control and asset protection, begins the article “Dynasty Trusts: Best Way to Protect Family Wealth” from NewsMax.

Just as their name implies, a dynasty trust is king of all trust types. It gives the family the most benefits in all of these areas. Still not convinced? Here are a few reasons why the dynasty trust is the best estate planning strategy for families who want to preserve an estate across many generations.

Most trusts provide for the transfer of assets from one benefactor to the next generation, at most two or three generations. A dynasty trust can last for hundreds of years. This offers tax advantages that are far superior than others.

Under the new tax laws, an individual can gift or bequeath up to $11.4 million during their lifetime, tax free. After that limit, any further transfer of assets are subject to gift and estate taxes. That same transfer limit applies whether assets are left directly via a will or indirectly through a trust. However, in a direct transfer or trust, these assets may be subject to estate taxes multiple times.

If a grantor transfers assets into a dynasty trust, those assets become the property of the trust, not of the grantor or the grantor’s heirs. Because the trust is designed to last many generations, the estate tax is only assessed once, even if the trust gets to be worth many times more than the lifetime exclusion.

Not all states permit the use of dynasty trusts. However, five states do allow them, while six others allow trusts with lifespans of 360 years or more. An experienced estate planning attorney will know if your state permits dynasty trusts and will help you set one up in a state that does allow them, if yours does not. Nevada, Ohio and South Dakota provide especially strong asset protection for dynasty trusts.

Because dynasty trusts are passed down from generation to generation, trust assets are not subject to the generation-skipping transfer tax. This tax is notorious for complicating bequeathals to grandchildren and others, who are not immediate heirs.

When the dynasty trust is created, the grantor designates a trustee who will manage trust funds. Usually the trustee is a banker or wealth manager, not a trust beneficiary. The grantor can exert as much control as desired over the future of the trust, by giving specific instructions for distributions. The trustee may only give distributions for major life events, or each heir may have a lifetime limit on distributions.

With these kinds of safeguards in place, a benefactor can ensure that the family’s wealth extends to many generations. Speak with an estate planning attorney to learn about the laws concerning dynasty trusts in your state and see if your family can obtain the benefits it offers.

Reference: NewsMax (September 16, 2019) “Dynasty Trusts: Best Way to Protect Family Wealth”

Suggested Key Terms: Dynasty Trust, Irrevocable, Benefactors, Grantor, Trustee, Estate Planning Attorney, Heirs

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Ignoring Beneficiary Designations Is a Risky Business

Ignore beneficiary forms at your and your heirs’ own peril, especially when there are minor children, is the message from TAPintoChatham.com’s recent article “Are You Read to Deal with Your Beneficiary Forms?” The knee-jerk reaction is to name the spouse as a primary beneficiary and then name the minor children as contingent beneficiaries. However, this is not always the best way to deal with retirement assets.

Remember that retirement assets are different from taxable accounts. When distributions are made from retirement accounts, they are treated as Ordinary Income (OI) and are subject to the OI tax rate. Retirement plans have beneficiary forms, which overrule whatever your will documents may state. Because they have beneficiary forms, these accounts pass outside of your estate and are governed by their own rules and regulations.

Here are a few options for beneficiary designations when there are minors:

Name your spouse as the primary beneficiary and minor children as the contingent beneficiaries. This is the usual response (see above), but there is a problem. If the minor children inherit a retirement asset, they will need a guardian for that asset. The guardian named for their care and well-being in the will does not apply, because this asset passes outside of the estate. Therefore, the court may appoint a Guardian Ad Litem to represent the child’s interest for this asset. That could be a paid stranger appointed by the court, until the child reaches the age of majority, usually 18 in most states.

Elect a guardian in the retirement plan beneficiary form. Some custodians have a section of their beneficiary form to choose a guardian for minor. Most forms, unfortunately, do not provide this option.

Make your estate the contingent beneficiary of the retirement account. While this would solve the problem of not having a guardian for the minor children, because it would kick the retirement plan into the estate, it may lead to adverse tax consequences. An estate does not have a measuring life, so the retirement asset would need to be fully distributed in five years.

Leave the assets to the minor children in a trust. This is the most effective means of leaving retirement assets to minor children without terrible tax consequences or needing to have the court appoint a stranger to oversee the child’s funds. Your attorney would either create a separate trust for the minor child or build a conduit trust under your will or a revocable trust to hold this specific asset. You would then change your beneficiary form to make said trust or sub-trusts for each minor child the contingent beneficiary of your retirement plan. This way you control who the guardian is for this asset for your minor child and are tax efficient.

Whichever way you decide to go, speak with an experienced estate planning attorney to determine which is the best plan for your family.

Reference: TAPintoChatham.com (Sep. 8, 2109) “Are You Read to Deal with Your Beneficiary Forms?”

Suggested Key Terms: Retirement Assets, Beneficiary Designation, Primary, Contingent, Guardian, Ordinary Income, Minor, Revocable Trust

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Living Together Isn’t as Simple as You Think

One reason for the popularity of living together without marriage, is that many in this generation have experienced one or more difficult divorces, so they’re not always willing to remarry, says Next Avenue in the article “The Legal Dangers of Living Together.” However, like many aspects of estate planning, what seems like a simple solution can become quite complex. Unmarried couples can face a variety of problematic and emotionally challenging issues, because estate planning laws are written to favor married couples.

Consider what happens when an unmarried couple does not plan for the possibility of one partner losing the ability to manage his or her health care because of a serious health issue.

If a spouse is rushed to the hospital unconscious and there is no health care power of attorney giving the other spouse the right to make medical decisions on his or her behalf, a husband or wife will likely be permitted to make them anyway.

However, an unmarried couple will not have any right to make medical decisions on behalf of their partner. The hospital is not likely to bend the rules, because if a blood relative of the person challenged the medical facility’s decision, they are wide open to liability issues.

Money is also a problem in the absence of marriage. If one partner becomes incapacitated and estate planning has not been done, without both partners having power of attorney, an illness could upend their life together. If one partner became incapacitated, bank accounts will be frozen, and the well partner will have no right to access any assets. A court action might be required, but what if a family member objects?

Without appropriate advance planning, courts are generally forced to rely on blood kin to take both financial and medical decision-making roles. An unmarried partner would have no rights. If the home was owned by the ill partner, the unmarried partner may find themselves having to find new housing. If the well partner depended upon the ill partner for their support, then they will have also lost their financial security.

Unmarried couples need to execute key estate planning documents, while both are healthy and competent. These documents include a durable power of attorney, a medical power of attorney and a living will, which applies to end of life decisions. A living trust could be used to avoid the problem of finances for the well partner.

Another document needed for unmarried couples: a HIPAA release. HIPAA is a federal health privacy law that prevents medical facilities and health care professionals from sharing a patient’s medical information with anyone not designated on the person’s HIPAA release form. Unmarried couples should ask an estate planning attorney for these forms to be sure they are the most current.

If one of the partners dies, and if there is no will, the estate is known as intestate. Assets are distributed according to the laws of the state, and there is no legal recognition of an unmarried partner. They won’t be legally entitled to inherit any of the assets.

If a married partner dies without a will in a community property state, the surviving spouse is automatically entitled to inherit as much as half the value of the deceased assets.

Beneficiary designations usually control the distribution of assets including life insurance policies, retirement accounts and employer-sponsored group life insurance policies. If the partners have not named each other as beneficiary designations, then the surviving partner will be left with nothing.

The lesson for couples hoping to avoid any legal complications by not getting married, is that they may be creating far more problems than are solved as they age together. An experienced estate planning attorney will be able to make sure that all the correct planning is in place to protect both partners, even without the benefit of marriage.

Reference: Next Avenue (Aug. 28, 2019) “The Legal Dangers of Living Together.”

Suggested Key Terms: Health Care Power of Attorney, Incapacitated, Durable Power of Attorney, Community Property, Beneficiary Designations. Estate Planning Attorney, HIPAA, Living Trust

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