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Dynasty Trust Related Questions

A dynasty trust is defined as a trust that is created in order to avoid or lower estate taxes that are applied each time family wealth is passed on to the next generation. According to Wikipedia, “Dynasty trusts in the United States are the combined result of the imposition of the generation-skipping transfer tax upon trusts that attempted to bypass transferring all assets to children, and the repeal of the rule against perpetuities by states attempting to attract the great wealth of such trusts. Given below are a few questions answered by the Experts on issues related to dynasty tax.

What is the disadvantage of a dynasty trust for the children of grantors?

What is believed to be the biggest disadvantage of a dynasty trust for children is that the beneficiaries don’t get stepped up tax basis from the previous generation. Typically, in a case where there are high value assets in a trust, the basis gets a step when the grantor dies. Since the assets will continue to be in the trust, the third generation will not be allowed to receive a tax basis step up once he second generation dies. A tax basis is generally used to add capital gain tax when the possession is sold.

Can someone create a dynasty trust in the State of Pennsylvania? And will it only last for 21 years after the death of the beneficiary?

An individual can set up a dynasty trust in the State of Pennsylvania. These trusts are irrevocable and in most cases, will live on forever. They are set up by high net worth individuals who want their families to enjoy the benefits of the trust for many generations to come. Assets that form part of a dynasty trust are typically not taxed as being a part of the estate of the trust creators or its beneficiaries. In a few states, there is a limit to the number of years over which a dynasty trust can be maintained unlike in Pennsylvania where it is perpetual.

How can dynasty trusts be used to avoid paying estate taxes?

A dynasty trust is a type of trust where assets can be passed down to the grantor’s grandchildren and not their own children. As a result, the grantor’s children will not receive title to the assets. What this does is allow the grantor to stay away from paying the estate taxes that would be imposed if the assets were switched over to their children first. A dynasty trust, however, can be used to offer financial benefits to the grantor’s children because the income that is made up by the trust’s assets can be made available to them. However, the assets would have to be left in the trust for the grandchildren.

There are many rules and regulations to be followed while setting up dynasty trusts. While a few of the questions addressed here may have clarified any doubts you may have had about the issue, there could be others you have that relate to your own case. In these cases, direct your queries to an Expert for quick and cost-effective solutions to your problems.
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