California estate owners who have a desire to pass along assets to subsequent generations may consider the benefits of creating trusts. It’s an appealing option because of tax advantages and the ability to have more control over how assets are distributed. A dynasty trust is simply an estate planning tool meant to last longer than one generation below that of the trust’s creator (grantor).
If specific asset limits are exceeded, a generation-skipping transfer tax is imposed on assets transferred to grandchildren or other descendants. It’s levied in addition to gift and estate taxes. However, trust assets are often protected from this type of taxation. What a dynasty trust does is remove family wealth from the tax transfer system. This protection continues for as long as the trust exists and its income and principal are passed along to subsequent generations.
A dynasty trust may be more appealing for a grantor if it’s structured as what’s termed a grantor trust. This means the trust’s creator is treated as the owner of the funds in the trust for tax purposes. Doing so allows the principal to grow without the added burden of income tax. This approach to setting up a trust provides an added tax benefit since the grantor will be making income tax payments instead of the trust. This means the trust’s assets aren’t reduced because of tax payments. Income tax paid by the grantor also reduces the size of a trust creator’s taxable estate.
When a client is ready to explore trust options, an estate planning lawyer may recommend seeking input from an accountant or financial advisor so all available assets can be identified. If a dynasty trust is the preferred option, an attorney could use the grantor’s distribution preferences to help establish appropriate guidelines for how future generations will receive assets that will be set aside.