One of the most frequent topics in my estate planning seminars is a Dynasty Trust (also called a Bloodline Trust). A Dynasty Trust is a trust that lasts for few generations through which you can leave your descendant s their inheritances with many benefits over a traditional estate plan:
The benefits of establishing a Trust for your children’s inheritances are:
1. Assets are protected from the spouses of your children. In a traditional estate plan, if you leave a child an inheritance and that child later gets a divorce, his or her ex-spouse will likely receive a portion of the inherited assets. This is because in real life, inheritances are almost always mixed with “marital assets”, which leaves them open to equitable distribution in a divorce. In addition, any income earned on the assets that your child does retain may end up being paid to the ex-spouse in the form of alimony or child support. Use of a Dynasty Trust can eliminate all of these negative consequences.
2. Assets are protected from financial crisis. In a traditional estate plan, if you leave a child an inheritance outright and the child later gets into financial trouble, those assets may be seized by creditors. With a Dynasty Trust, however, those assets can be safeguarded.
3. Assets are protected from double (or triple) taxation. When you pass away, your assets are included in your “taxable estate” and as such are subject to New York and federal estate taxes. With a traditional estate plan, not only are those assets subject to estate tax at your death, but when your children die, any remaining assets will be subject to estate tax a second time when they pass down to your grandchildren, and potentially a third time if any assets pass down to great-grandchildren. With a Dynasty Trust, this double or triple taxation can be eliminated completely.
Now that we went over the benefits, here are the mechanics of how these trusts work.
Upon your death (or the death of both you and your spouse, if married), your assets are split among your children in a manner that you decide, but instead of each child receiving his or her share outright, each child’s share is put into a separate trust for his or her benefit.
You can allow your child to be trustee of his or her own trust if you so desire, with another Independent Trustee who will make distributions from the trust to your child, or you may also choose a third-party trustee like a bank or trust company to be the independent Trustee. During your life, you can be a trustee of the Trust, and your children can step in as successor trustees in the case of your incapacitation or death.
Regardless of who is trustee, the trustee may invest trust assets. The trustee may also purchase assets in the name of the trust for use of your child. If your child is trustee, he or she may also withdraw assets from the trust for his or her “health, education, maintenance, and support” with the consent of the independent trustee.
If a divorce or other financial trouble is on the horizon, the independent Trustee will not make a distribution to your child’s creditors to satisfy the child’s financial obligations or debts.
These trusts have become increasingly common as parents seek to protect their children from both divorce and double taxation.
Contact estate planning attorney Viktoria Beress at Beress & Zalkind to have a proper estate, tax and asset protection planning that will work for you.