Dear Len & Rosie, I am helping my 85-year-old mother ensure that her estate plan is in order, and I am also planning for myself. I am very interested in the dynasty trust, but am confused about a few aspects. What are they all about? - Norman
Dear Norman, One of the questions about estate planning is what happens to the inheritance you pass on to your children. Will they spend it? Will they lose it in a lawsuit? Will they give it to their spouse instead of leaving it to your grandchildren? Do you want your ex-son-in-law driving a Lexus bought with what used to be your money?
Dynasty trusts are designed to protect the inheritance you leave to your children from creditors, spouses, and future estate taxes. Your mother can update her estate plan to leave you an inheritance in a dynasty trust instead of giving it to you out right. There are several advantages to this.
First, since it’s in a trust, your inheritance isn’t really your property, even if you are the trustee. That means your inheritance will benefit from creditor protection. While we cannot guarantee that you would never lose your inheritance in a lawsuit, a properly drafted and managed dynasty trust should protect you if you ever get sued.
Second, since your inheritance is held in a completely separate trust, segregated from your other assets, it’s easier to protect its status as your separate property than if you held everything directly in your name. Since you don’t really own your dynasty trust, neither will your spouse, even if you get divorced.
Third, and perhaps most importantly, a dynasty trust creates a dynasty.
The amount of your inheritance that is exempt from Generation Skipping Transfer Tax may be held within the dynasty trust for generation after generation with no additional estate tax due on your death, or the deaths of your descendants. The duration of the dynasty trust is limited only by a law called the Uniform Statute Rule Against Perpetuities, which requires a final outright distribution of the trust within 90 years of your mother’s death. And it’s even possible to create a dynasty trust in certain states (not California) that can last forever, at least from a legal perspective. The point here is that if you invest your inheritance instead of spend it, then it can continue to grow for generations while continuing to avoid the federal estate tax.
If your mother creates a dynasty trust for your inheritance, she will be able to decide what, if any, rights you have to decide who gets to inherit the trust upon your death. Maybe she’ll let you cut your wife in for a share. Or maybe not. She could even create a dynasty trust for your benefit with someone else as trustee if you’re not so good with money. With a dynasty trust, your mother can provide for her descendants for generations to come. - Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, 996-4505, or www.lentillem.com. Len also answers legal questions each weekday, noon to 12:45 p.m., and Sundays, 4-7 p.m., on KGO Radio 810 AM.