Wealth Bomb

The dynasty trust is the mother of all planning techniques. Its benefits and potential harm require serious thought and likely some soul searching.

Because it enables the passage of assets across numerous generations 100% free of estate and gift tax, the dynasty trust presents the ability to accumulate wealth unlike any other planning technique. It follows, then, that the dynasty trust requires thoughtfulness and introspection unlike any other, as well.

A dynasty trust can be an effective way to leverage the current historically high federal estate, gift and generation-skipping tax exemptions. However, the prospect of leaving tens or eventually even hundreds of millions of dollars to future generations you will never meet is daunting. Intimidating. Even borderline mind blowing.

Planning for this technique will force you to consider anew your values and the influence you wish to have on future generations. Not just your own mortality, but a sort of immortality.

Clearly these trusts have their share of pros and cons. Here I will try to share some of the most significant. The most basic reasons for dynasty trusts are enhanced asset appreciation and protection. The trusts’ very long durations¹ makes them perfect for aggressive asset classes with commensurately long time horizons, and with effective application of the the federal estate, gift and GST exemptions their growth will not be kneecapped by estate taxes as they pass across generations. Further, they sport creditor protection features that can protect your progeny’s net worth through divorces, lawsuits, bankruptcies and the other sundry joys of living.

They can be used to keep treasured possessions in the family, protecting ranchland or an art collection from the greed (or bad taste) of a future inheritor.

These trusts can even be set up to influence behavior, such as getting good grades, earning a degree, being employed and avoiding addictions.

These are called incentive trusts, and some families include a written essay to explain the logic, intentions and philosophies reflected by the trust’s provisions. One Chicago couple explained to their future beneficiaries that their trust was designed according to their wish that their descendants lead lives that are full and active, meet their potential, create more opportunities for others than they themselves have been given and that they strive to provide for their families as if the trust did not exist.

That’s a lot of wisdom for a legal document. While other trusts are just as permanent, they are not all as thoughtful. Which brings us to some important considerations.

Relative Is a Relative Term 

While the growth potential of dynasty trusts may be eye-popping, your genetic linkage to its future beneficiaries may be infinitesimal. In 150 years the average person can expect to have 450 descendants. Over a longer time frame? Well, consider the strange case of Samuel Hinckley, forefather of presidents. Mr. Hinckley died in 1662. His descendants include two U.S. presidents, both named Bush. And a third, a cousin named Obama. Mr. Hinckley’s estate plan likely failed to anticipate this.

As time passes, and your assets and descendants multiply, your trust documents could become antiquated.

Incentives that made sense generations ago might merely breed resentments in the future. Today’s consensus that equal distributions are fair distributions could, for instance, yield to a radically different understanding generations from now.

There are no easy answers to these questions. In fact, there are no answers, period. So once you have poured your wisdom, philosophies and soul into your plan, work with your estate counsel to draft it with considerable flexibility. Consider giving future generations the ability to amend or decant it, and contemplate assigning a low level of fiduciary liability to future trustees. In other words, let your legacy breathe, and give it light.

And, of course, consider alternatives. The dynasty trust is not the only way to leave money to future generations. More traditional approaches to estate planning make outright distributions to children and grandchildren at designated ages. The rest is left to them. There are also many ways to leave your wealth to charities or foundations for the perpetual benefit of a wide range of causes. Come to think of it, these are just another group of people who you will never meet! And that might be OK, too.

We Are Here

A dynasty trust is a powerful tool to transfer wealth down many generations free of gift and estate taxes. Given the current historically high federal estate, gift and GST exemptions, now is a particularly opportune time. Having said that, these exemptions are scheduled to reduce close to 50% of their current levels at the end of 2025. This may, or may not, happen depending on the results of the November national elections, but it may. With that possibility in mind, if this strategy appeals to you, now is the time to examine it closely.

 

1. Depending on the state they are created in.

 

About Fieldpoint Private

Fieldpoint Private is a boutique private banking firm established at the onset of the financial crisis by 31 individuals including former Chairmen and CEOs of some of the most well-known and successful financial and consumer firms in America. Their intent was not to craft a firm that would emulate the large, established institutions, but to serve as an alternative. Dedicated to meeting the comprehensive financial needs of highly successful individuals, families, businesses and institutions, Fieldpoint Private offers a powerful combination of private personal and commercial banking services directly and in partnership with our clients’ most trusted advisors. In 2021, Fieldpoint Private founded Fieldpoint Private Trust, increasing the breadth of capabilities available to serve our clients in both sole trustee and co-trustee capacity.

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