How does a dynasty trust help?

| Nov 4, 2019 | Uncategorized

After a lifetime of hard work, many want to pass on the fruits of their labor to future generations. All the hours logged during their career have likely yielded an impressive sum of money. And brightening the financial future of children and grandchildren is a noble pursuit. But those who have spent much of their life working are aware of the fact that a good chunk of the money they’ve earned has gone to taxes.

When seeking to pass on funds, many opt to use trusts. But even with trusts, taxes strike again, taking allotted portions. So, the pool of funds gets smaller and smaller with each passing generation, as taxes take their toll. Growth is certainly there, it’s just stunted. The dynasty trust aims to change that.

The benefits of a dynasty trust

Dynasty trusts are nothing new. Historically used by wealthy families, this tool lets those lump sum funds accrued over years of labor pass through generations unscathed by huge taxes. In a hypothetical example by RBC Wealth Management, it was shown that after a $22 million dollar gift, the sum total rose to $50 million across generations without a dynasty trust, and $231 million with. Though different factors will yield different results, the difference can be substantial. The transfer taxes that dynasty trusts avoid include:

  • Gift taxes: This is a federal tax that applies whenever someone transfers a “gift” of any value.
  • Estate taxes: This tax applies to the assets of a person who is deceased.
  • Generation skipping taxes: This tax essentially are transferred down two generations. So, when grandparents transfer funds to a grandchild, this tax applies. It can also apply when the age gap is 37.5 years.

Being able to pass on large sums of money that will avoid these taxes probably seems like a dream come true. It is important to remember however that dynasty trusts are irrevocable. Once they are setup and everything is signed and in writing, it cannot change.

This is probably one of the biggest caveats to dynasty trusts. It requires a lot of planning, but the effort could very much prove worth it. If you’re interested in learning more about how to protect funds and assets for generations to come, get in contact with a legal professional. After all you’ve worked long and hard to earn what’s yours. And before you can make your fortune theirs, avoid making costly mistakes.