A Dynasty Trust contains special provisions for the continuation of the trust after your death(s) for the benefit of your beneficiaries. The Trust provides for the creation of a Legacy Trust. A separate Legacy Trust will be set up from the original trust for each of the beneficiaries you have identified. The Legacy Trust is designed to protect the assets in the Legacy Trust from the creditors of the beneficiary, from estate and death taxes at the death of the beneficiary, from claims of spouses in the event of a divorce, and to insulate assets in the trust from being deemed available resources in the event of the beneficiary’s disability in case he or she is otherwise eligible to receive public assistance such as Medicaid or supplemental social security income.
In most cases, the initial beneficiary may serve as the trustee of his/her Legacy Trust, and as such, will have full discretion with respect to the investment of the assets so long as they remain in the trust. In addition, the beneficiary is normally entitled to all of the income from the trust, so long as he/she is not disabled and has the right to withdraw principle for their health support, maintenance, and education (with the concurrence of a co-trustee or back-up trustee). The beneficiary also has the right each year to withdraw 5% of the intangible property, i.e. cash, or cash equivalents, investments, etc. held by their trust for any purpose without restriction to health support, maintenance, or education.
Finally, the beneficiary of a Legacy Trust will have the limited power to direct in their Last Will and Testament, to use what is known as a “power of appointment,” to direct how the Legacy Trust shall pass at their death. Normally they can “appoint” the trust outright or in further trust to their children or any descendent of you and your spouse. In other words, the may leave the Legacy Trust to anyone in the family. In some cases, you also may request that the child be given authority to appoint the property to a Legacy Trust for the benefit of their spouse. This additional power may be appropriate where the child has no children.
Legacy Trusts are designed not to be subject to the federal generation skipping tax (GST) up to the individual generation skipping tax exemption permitted by law to you and your spouse; this exemption is presently the same level of exemption as for the federal estate tax: $5M, adjusted for inflation. There are special provisions included in the trust document to deal with any assets when the trust exceeds the federal generation skipping tax exemption amount. Generally, these assets would be subject to immediate withdrawal by the beneficiary, i.e. in 2015, the amount over $5.43M and, therefore, these assets may be taxed in the estate of the beneficiary upon the beneficiary’s death but be exempt from any generation skipping tax.
Like the federal estate tax, the generation skipping tax exemption must be elected at the time of a taxpayer’s death. Therefore, it is important where you are using a Dynasty or Legacy Trust, that, at the death of the grantor or grantors, the applicable generation skipping tax exemption be taken at each death. You or your family should discuss this election with your tax advisor or CPA at the time a Legacy Trust is to be created.
Keep this letter with your trust document for further reference for review with your tax advisors and any attorney or CPA who may be helping with estate planning, and post mortem trust administration.
If you have additional questions regarding your trust, and the Legacy Trusts to be created after your death(s), please feel free to contact us.