Wyoming Dynasty Trust Seminar Outline

Published on December 2016 | Categories: Documents | Downloads: 36 | Comments: 0 | Views: 180
of 19
Download PDF   Embed   Report

Wyoming Dynasty Trust OverviewMost clients come to an estate planner with the following issues: • how do we keep control of our wealth during life;• how do we plan to obtain the maximum creditor protection available;• how do we minimize the estate taxes upon our deaths;• how do we provide for our children, our children’s children, and successive generations;• how do we leave a legacy for our families and our community;• how do we provide the best creditor and failed marriage protection for our children, our children’s children, and successive generations; • how do we minimize the estate taxes upon the deaths of our children, our grandchildren, and that of successive generations; and• how do we accomplish these goals most efficiently and cost effectively.

Comments

Content

Dynasty Trusts Estate Planning for Successive Generations

By:

Carol H. Gonnella & M. Jason Majors G !!E""# & M#J $S% &c '(' Sout) *illo+ Street P. . Bo, -../ Jac0son% *1 2344534(6 (337'284 voice 534(6 (3974'99 facsimile

Co&yrig)t .442 : Carol H. Gonnella

Dynasty Trusts Estate Planning for Successive Generations Ta;le of Contents
Section Descri&tion
Disclaimer One Two Introduction Generation Skipping Transfer Tax Basis Three Ad antages of a D!nast! Trust #our The $reation of a D!nast! Trust #i e &ow 'ong $an a D!nast! Trust 'ast Six (aking the D!nast! Trust )ithstand the Test of Time Se en Alaska Trusts %* %4 %3 %% "

Page
3 4 4

Dynasty Trusts Estate Planning for Successive Generations Page 7 . of -2

Disclai<er
The materials contained in this outline and presented +! $arol &, Gonnella and-or Gonnella . (a/ors0 1$ are intended to pro ide the readers and participants with guidance in d!nast! trust planning and administration, The materials prepared +!0 and comments of an! of the a+o e0 do not constitute0 and should not +e treated as0 legal ad ice regarding the use of d!nast! trusts or the tax conse2uences associated with the use of d!nast! trusts, Although all of the a+o e ha e made e er! effort to assure the accurac! of these materials and the accompan!ing presentation0 none of the a+o e0 do not assume responsi+ilit! for an! indi idual3s reliance on these printed materials or the related presentations, An! indi idual interested in d!nast! trusts should independentl! research and erif! the effecti eness0 tax conse2uences0 ad antages0 disad antages0 and other aspects of a d!nast! trust,

Dynasty Trusts Estate Planning for Successive Generations Page 7 3 of -2

Section

ne.

=ntro>uction

(ost clients come to an estate planner with the following issues4 • • • • • • • • how do we keep control of our wealth during life5 how do we plan to o+tain the maximum creditor protection a aila+le5 how do we minimi6e the estate taxes upon our deaths5 how do we pro ide for our children0 our children3s children0 and successi e generations5 how do we lea e a legac! for our families and our communit!5 how do we pro ide the +est creditor and failed marriage protection for our children0 our children3s children0 and successi e generations5 how do we minimi6e the estate taxes upon the deaths of our children0 our grandchildren0 and that of successi e generations5 and how do we accomplish these goals most efficientl! and cost effecti el!,

Traditionall!0 these o+/ecti es were accomplished through a ariation of different estate planning strategies such as re oca+le li ing trusts0 famil! limited partnerships0 limited lia+ilit! companies0 irre oca+le life insurance trusts0 charita+le gi ing0 and a host of other alternati es, &owe er0 most of these planning strategies transferred wealth to children directl!0 thus su+/ecting the assets to taxation upon the children3s deaths0 and further su+/ecting them to taxation upon the deaths of future generations, &owe er0 when clients are educated a+out the +enefits of planning multi7generationall!0 man! iew this t!pe of planning as a golden opportunit! to gi e their inheritance to their +eneficiaries with the following protections4 • • • • • effecti e control +! the +eneficiar! o er the assets for their use5 creditor protection5 failed marriage protection5 philosoph! and incenti e language for producti it!5 elimination or reduction of federal estate taxation for future generations,

Section ..

Generation S0i&&ing Transfer Ta, Basics

&istoricall!0 affluent families esta+lished trusts for the +enefit of their children and successi e generations with sufficient 8strings9 attached so the assets in the trust were not su+/ect to estate taxation for man! future generations, To stop persons from what was percei ed as circum enting the federal estate tax with these strategies0 $ongress in %:;< adopted $hapter %3 of the I=$0 imposing a tax of each transfer of wealth to successi e generations that escaped taxation in the prior generation3s estate, The Tax =eform Act of %:"<0 as amended0 repealed this first ersion and restated $hapter %30 imposing a tax on transfers of propert! that are made to 8skip persons90 either during life or upon death, This tax is known as the generation-skipping transfer tax >GSTT? and is the top marginal gift and estate tax rate at the time of transfer >presentl! **@?, The GSTT is in addition to an! gift or estate tax applied to the transfer0 and
Dynasty Trusts Estate Planning for Successive Generations Page 7 9 of -2

there is no unified credit against the GSTT and no lower +rackets for the first A<;*0BBB to A30BBB0BBB in transfers, The good news is that $ongress has allowed certain transfers to +e excluded from this onerous tax0 which now allows all clients to take ad antage of generation skipping, These exclusions are4 • • • The GSTT annual exclusion under Section C<4C>c?5 Tuition and medical expense exclusion under Section C*B3>d?5 The lifetime GSTT exemption0 historicall! A% million0 and now0 as amended with the Tax =elief Act of %::;0 increased annuall! +! the federal inflationar! index, As of !ear CBBB0 this exemption is A%0B3B0BBB, This increase can onl! +e made in increments of A%B0BBB0 rounded down to the nearest A%B0BBB,

These exclusions offer some wonderful planning opportunities, &owe er0 to utili6e these +enefits0 the planner must +e aware of some of the +asic GSTT rules, =>entifying t)e Parties Before calculation of the tax0 the identification of the 8Transferor9 must +e determined0 and the Transferee must +e a 8Skip 1erson9 rather than a 8Don7skip9 1erson >$ode Section C<%3>a??, Ender $hapter %30 the Transferor is the indi idual with respect to whom propert! was most recentl! su+/ect to federal estate or gift taxation, >$ode Section C<*C>a??, )hether or not a tax lia+ilit! was actuall! incurred is irrele ant, Transferees who are either in a prior generation0 the same generation0 or onl! one generation !ounger than the transferor are called 8non7skip9 persons, The GSTT does not appl! when wealth is transferred to them, Transferees who are at least two generations !ounger then the transferor are called 8skip9 persons, Transfers to skip persons trigger the tax, 1ersons unrelated to the transferor3s grandparents are assigned to generations +ased upon their age relati e to the transferor3s, %, C, 3, 4, 1ersons on more than %C F !ears !ounger than the transferor are assigned to the same generation as the transferor, The! are non7skip persons, 1ersons %C F to 3; F !ears !ounger than the transferor are assigned to the next generation !ounger than the transferor, The! are non7skip persons, 1ersons 3; F to <C F !ounger than the transferor are assigned to the generation two generations !ounger than the transferor, The! are the first generation of skip persons, #or e er! C* !ear age difference thereafter0 a person is assigned to a successor generation, An! person two or more generations !ounger than the transferor is a skip person,
Dynasty Trusts Estate Planning for Successive Generations Page 7 ' of -2

$harities and tax7exempt organi6ation are alwa!s non7skip persons, Gstates0 partnerships0 corporations and other entities are classified +! the status of the persons who hold the +eneficial interests, >I=$ Section C<*%>e?>C??, Classifying t)e Transfer $hapter %3 applies comprehensi el! in e er! concei a+le wa! to transfer wealth to a skip person, It does so +! taxing three t!pes of transfersHdirect skips0 taxa+le terminations0 and taxa+le distri+utions, a. Direct S0i&.

A direct skip transaction is one where+! a transferor0 during the transferor3s lifetime0 con e!s propert! to a 8skip person9 transferee0 >a? who is two or more generations remo ed from the transferor0 or >+? to a trust in which all +eneficiaries are two or more generations remo ed from the transferor, • Gxample of Taxes on a Direct Skip During 'ifetime

Grandfather gifts A%0BBB0BBB,BB to a grandchild during life >assuming **@ GSTT rate and **@ gift tax rate? #ederal Gift Tax on Gift GSTT Tax on Gift #ederal Gift Tax on GSTT Total Tax 1aid Det Gift to Grandchild • ACC:0BBB,BB ACC:0BBB,BB A%C<0BBB,BB A*"40BBB,BB A4%<0BBB,BB

Gxample of Taxes on a Direct Skip After Death

Grandfather3s estate distri+utes A%0BBB0BBB,BB to a grandchild >assuming **@ GSTT rate and **@ gift tax rate? #ederal Gstate Tax on De ise GSTT Tax on Death #ederal Gift Tax on GSTT Total Tax 1aid Det Gift to Grandchild ;. Ta,a;le Ter<ination. A**B0BBB,BB ACC:0BBB,BB A%C<0BBB,BB A;%B0BBB,BB AC:B0BBB,BB

A termination of a trust due to the death of a +eneficiar! under the trust0 resulting in the assets of the trust +eing transferred to one or more 8skip person9 +eneficiaries >a? who are two or more generations remo ed from the transferor0 or >+? to a trust in which all +eneficiaries are two or more generations remo ed from the transferor,
Dynasty Trusts Estate Planning for Successive Generations Page 7 / of -2



Gxample of Taxes on a Taxa+le Termination

Trust distri+uted A%0BBB0BBB,BB to a grandchild of the trustmaker >assuming **@ GSTT rate and **@ gift tax rate? #ederal Gstate on Transfer GSTT Tax on Transfer Total Tax 1aid Det Distri+ution to Grandchild c. Ta,a;le Distri;ution. A**B0BBB,BB AC4"0BBB,BB A;:"0BBB,BB ACB30BBB,BB

An! distri+ution of trust assets from a trust to a 8skip person9 +eneficiar! >a? who are two or more generations remo ed from the transferor0 or >+? to a trust in which all +eneficiaries are two or more generations remo ed from the transferor, • Gxample of Taxes on a Taxa+le Distri+ution

Trust distri+uted A%0BBB0BBB,BB to a grandchild of the trustmaker >assuming **@ GSTT rate and **@ gift tax rate? #ederal Gstate on Transfer GSTT Tax on Transfer Total Tax 1aid Det Distri+ution to Grandchild *)o is "ia;le for t)e Generation7S0i&&ing Ta, The transferor is lia+le for GSTT on all outright direct skips, $ode Section C<B3>a? >%?, Assuming the transferor has alread! used up his a aila+le unified credit0 the com+ined gift-estate tax and GSTT are calculated as follows4 >All examples appl! **@ GSTT and **@ estate and gift tax rate for simplicit! of illustration,? Lifetime Direct Skip to a Grandchild: Det gift to grandchild Grandparent3s Assets #ederal Gift Tax on Gift Generation Skipping Transfer Tax on Gift #ederal Gift Tax on GSTT Total Tax A4%<0BBB A%0BBB,BBB ACC:0BBB ACC:0BBB A%C<0BBB A*"40BBB A**B0BBB,BB AC4"0BBB,BB A;:"0BBB,BB ACB30BBB,BB

Dynasty Trusts Estate Planning for Successive Generations Page 7 ( of -2

After Death Direct Skip to a Grandchild: Det gift to grandchild Amount De ised to Grandchild #ederal Gstate Tax on De ise Generation Skipping Transfer Tax on Gift GSTT on Devise Total Tax AC:B0BBB A%0BBB0BBB A**B0BBB ACC:0BBB ?-/4%444 A;%B0BBB

In the case of a taxa+le distri+ution0 the GSTT is +ased on the amount recei ed +! the transferee and the transferee is lia+le for the tax, $ode Section C<B3 >a? >%?, In the e ent that the trustee pa!s the tax on the taxa+le distri+ution from other trust propert!0 then such pa!ment is considered an additional taxa+le distri+ution, Treasur! =egulation C<,C<%C7% >c?, The calculation of the tax on a taxa+le distri+ution in which the grandparent de ises assets to a trust for a child for life then to a grandchild is as follows4 Amount De ised to Trust #ederal Gstate Tax on Transfer to Trust Det to $hild GSTT Amount distri+uted to Grandchild Total Tax A%0BBB0BBB A**B0BBB A4*B0BBB AC4"0BBB ACB30BBB A;:;0BBB

On a taxa+le termination the trustee is lia+le for the tax and the amount of tax is +ased on the propert! with respect to which there is a termination, The calculation of the tax on a taxa+le termination is the same as the calculation for the tax lia+ilit! with respect to a taxa+le distri+ution,

Section T)ree.

T)e #>vantages of a Dynasty Trust.

The following is a non7exhausti e list of ad antages that ma! +e reali6ed from the creation of a d!nast! trust, a. $e>uction or eli<ination of Estate Ta,es.

The a+ilit! to transfer the assets to successi e generations without diminishing the si6e of the estate from federal estate taxes is an incredi+le ad antage, Since in a d!nast! trust the assets are held within the trust and are not transferred at the death of each +eneficiar!0 +ut rather remain in the trust for the +enefit of successi e generations of +eneficiaries0 there are no transfers of wealth +etween
Dynasty Trusts Estate Planning for Successive Generations Page 7 2 of -2

familial generations, )ithout the transfer of wealth +etween famil! mem+ers0 there are no estate taxes0 no GSTT taxes0 and no gift taxes, )ith a d!nast! trust0 those same assets will onl! +e taxed when0 if e er0 the! are transferred out of the trust, )ith proper planning0 once the trustmaker transfers the assets and designates them as exempt under the GSTT exemption0 the assets plus all income and appreciation attri+uta+le to them are not taxed to successi e generations, Below is a graph with a +eginning +alance of A%0BBB0BBB e idencing three generations >defined as e er! twent!7fi e >C*? !ears?0 one su+/ect to estate taxation and one d!nast! pro+ated0 and thus not su+/ect to estate taxation4
Year Starting Balance Growth at 7% Accumulated nterest ! "rinci#al $state Ta%es at &hild's (eath )emaining Balance Growth at 7% Accumulated nterest ! "rinci#al $state Ta%es at Grandchild's (eath )emaining Balance Growth at 7% Accumulated nterest ! "rinci#al $state Ta%es at Great Grandchild's (eath )emaining Balance 0et Ad1antage o2 GSTT Ta% "lanning 0 25 25 25 25 50 50 50 50 75 75 75 75 GSTT Trust $1,000,000.00 $4,725,418.00 $5,725,418.00 0 $*,7+*,,1-.00 $27,054,995.00 $32,780,414.00 0 $/+,7-0,,1,.00 $154,901,164.00 $187,681,577.00 0 $1-7,.-1,*77.00 $170,*73,03/.-. Without GSTT Trust $1,000,000.00 $4,725,418.00 $5,725,418.00 $3,148,979.90 $+,*7.,,/-.10 $12,174,747.54 $14,751,185.64 $8,113,152.10 $.,./-,0//.*, $31,367,484.56 $38,005,518.10 $20,903,034.96 $17,10+,,-/.1,

Dynasty Trusts Estate Planning for Successive Generations Page 7 8 of -2

;.

=nco<e Ta,es.

If the trustmaker creates the trust as a Grantor Trust0 also known as an 8Intentionall! Defecti e Irre oca+le Trust >IDIT?0 the trustmaker0 rather than the trust0 pa!s an! income tax on income generated +! the trust, This pa!ment of taxes +! the trustmaker in effect0 is an additional free gift to the trust as the trust is not re2uired to pa! the taxes, c. Cre>itor Protection.

Do famil! mem+er wants to see his or her hard7earned mone! accessed +! the creditors of a +eneficiar!, Once a d!nast! trust +ecomes an irre oca+le trust or 8spendthrift trust90 creditors of the +eneficiar! ha e an extremel! difficult0 if not impossi+le time0 attaching trust assets, If the trust ac2uires assets desired +! the +eneficiaries0 instead of gi ing the +eneficiaries the funds to +u! these assets outright0 the additional assets will recei e the same creditor protection as the existing assets in the trust, >. @aile> Marriage Protection.

Along the lines of the creditor protection0 the d!nast! trust also protects trust assets from a +eneficiar!3s failed marriage0 or put another wa!0 gi es the +eneficiaries 8predator protection9, Since the trust owns the trust assets and the decision as to whether or not a +eneficiar! recei es distri+utions from the trust is discretionar!0 a di orcing spouse of a +eneficiar! is una+le to attach the trust assets and the! are not su+/ect to di ision +! a di orce court,, e. Beneficiary Gui>ance.

A d!nast! trust also allows a trustmaker to gi e guidance to the trustee as to how a +eneficiar! utili6es the +enefit of the trust, If a trustmaker is worried a+out a +eneficiar!3s a+ilit! to handle finances in a responsi+le or effecti e manner0 the trustmaker ma! place detailed strings in the trust agreement setting forth how assets are to +e distri+uted from the trust, In essence0 a trustmaker can pass along his or her fiscal and li ing philosophies to successi e generations of +eneficiaries, f. Continuity of Estate Planning.

A d!nast! trust ena+les a famil! to ha e one comprehensi e scheme of estate planning running for consecuti e generations, $lients need no longer worr! that their children will not properl! plan the inheritance the! ha e pro ided for them, #or those clients who wish to keep their propert! within their +loodlines0 d!nast! planning is er! effecti e,

Section @our.

T)e Creation of a Dynasty Trust
Dynasty Trusts Estate Planning for Successive Generations Page 7 -4 of -2

A d!nast! trust ma! +e created during the life of the trustmaker as an irre oca+le trust or as part of a re oca+le trust or will0 to +ecome effecti e upon the death of the trustmaker, #or lifetime transfers0 the allocation of the GSTT exemption is generall! made +! an election on the federal gift tax return for the !ear in which the gift is made, )ith respect to transfers made effecti e upon death0 the allocation is made on the federal estate tax return, There is an automatic allocation to direct skips made during life and direct testamentar! skips, &owe er0 for all other transfers0 if the allocation is not made0 it is lost, The general rule is as follows4 *)en in >ou;tA#llocate a. T)e "ifeti<e =rrevoca;le Trust

A trustmaker ma! create an irre oca+le trust during life +! gi ing a gift to the trust and appl!ing the annual gift tax exemption or the lifetime applica+le credit amount to the trust, >$aution4 care must +e used to follow the * and * rule of Section C*%4>e??, A trustmaker who creates the trust as a 8Grantor Trust >or IDIT? ma! make additional nontaxa+le gifts to the trust in the form of the income taxes paid +! the trustmaker on the income generated +! the trust, The gift0 the income7tax paid0 plus all appreciation of the assets within the trust are now out of the trustmaker3s estate, The GSTT exemption ma! +e greatl! le eraged +! the purchase of life insurance in a d!nast! life insurance trust, If properl! planned0 onl! the premium gifts to the trust must +e allocated to the GSTT exemption0 not the life insurance death proceeds, The allocation date +ecomes crucial0 as disastrous conse2uences can occur if the allocation is not timel! made on the gift tax return0 rather than waiting until the automatic allocation upon death, B! wa! of example4 Sam creates a d!nast! I'IT naming his $1A as trustee, Sam transfers A4BB0BB to the trust +ank account and the trustee purchases a A* million life insurance polic!, Sam does not file a gift tax return to allocate his GSTT exemption +efore his untimel! death, The insurance compan! pa!s to the trustee the A* million death proceeds, Sam3s executor files an estate tax return allocating Sam3s A% million exemption to the now A* million in the trust, &ad a timel! gift tax return +een filed0 onl! A4BB0BBB of Sam3s exemption would ha e +een used to shelter the entire A* million0 gi ing the entire amount d!nast! protection, Sam would ha e A<BB0BBB remaining of his GSTT exemption to use for other assets, &owe er0 due to the late filing0 onl! one7fifth of the propert! in the I'IT is now GSTT exempt0 su+/ecting A4 million to the onerous GSTT tax,

;.

# Dynasty Trust in $evoca;le Trust Planning
Dynasty Trusts Estate Planning for Successive Generations Page 7 -- of -2

A client3s re oca+le trust can pro ide that0 upon death0 an amount e2ual to the a aila+le unused GSTT exemption is to +e segregated into a d!nast! trust for the +enefit of his-her descendants, It is often created as separate shares for each child0 called 8exempt shares9, The portion of the estate in excess of the a aila+le exemption will +e transferred to +eneficiaries using traditional estate planning methods, This amount is often held in separate shares for each child0 called 8nonexempt shares9, The trustee ma! +e directed to use the propert! in each child3s exempt share for the +enefit of the child whene er the assets in the nonexempt share are not sufficient to ade2uatel! pro ide for the child, Generall!0 the ascertaina+le standards of health0 education0 maintenance and support are used for guidance in determining when distri+utions ma! +e made, #or clients wishing the child to ha e maximum control0 the child ma! +e named a trustee of the trust,

c.

$evoca;le Trust Dynasty Planning for S&ouses

It is imperati e to plan carefull! for married couples to full! en/o! the +enefits of +oth of their GSTT exemptions, 1roperl! planned in !ear CBBB aluations0 a hus+and and wife ma! d!nast! protect AC0B<B0BBB in assets, &owe er0 as stated earlier0 a person must +e deemed the Itransferor9 of propert! to 2ualif! for the GSTT exemption, This ma! pose a pro+lem with the t!pical estate plan created +! a married couple, Such a plan generall! allocates the applica+le exclusion amount >A<;*0BBB in CBBB? to a credit shelter trust0 with the remaining +alance to a marital deduction trust, The propert! in the credit shelter trust is deemed that of the decedent0 and the decedent 2ualifies as the 8transferor9 for GSTT purposes, &owe er0 the assets in the marital deduction trust are deemed those of the sur i ing spouse0 so the decedent is no longer the 8transferor9, Thus the decedent3s remaining GSTT exemption ma! +e lost, To full! utili6e +oth exemptions0 a special election ma! +e made as to part of the marital trust, The remaining +alance of the decedent3s exemption of A3**0BBB >A%0B3B0BBB7A<;*0BBB in !ear CBBB aluations? is placed in its own separate marital deduction trust called a reverse QTIP The propert! in this re erse JTI1 is treated as +elonging to the decedent rather than the sur i ing spouse for GSTT tax purposes +ut as +elonging to the sur i ing spouse for estate tax purposes, Thus0 the decedent remains the transferor of the propert! for GSTT purposes and0 +! making the proper allocations0 can utili6e the decedent3s entire GSTT exemption, $AETIOD4 The re erse JTI1 election must +e made on the decedent3s estate tax return, Epon the death of the sur i ing spouse0 his-her estate shall +e entitled to use all of the sur i ing spouse3s GSTT exemption,

Dynasty Trusts Estate Planning for Successive Generations Page 7 -. of -2

Section @ive.

Ho+ "ong Can a Dynasty Trust "ast.

A d!nast! trust is a trust that passes 8life interests9 in propert! for as long as the state law allows, State statutes generall! pro ide that a transfer of a propert! interest in trust will not +e alid unless it ests within the time of a life or li es in +eing plus C% !ears, This is the classic r!le against perpet!ities" and is the rule in the State of )!oming, )ith this rule0 trusts can last +etween %BB to%CB !ears0 depending on the li es named in the trust document, Some states >ie4 $alifornia? ha e a statutor! :B !ear rule as the amount of time a trust can last, The trend presentl! is for states to a+olish and relax the rule against perpetuities, States ha ing a+olished or relaxed the rule are Idaho0 Dorth Dakota0 Alaska0 )isconsin0 Delaware0 and Illinois, 'egislation is presentl! pending in De ada and Dew Kork0 +ut has not +een passed, a. Deci>ing *)ere to Site t)e Dynasty Trust.

#or man! clients0 esta+lishing a d!nast! trust lasting approximatel! %BB !ears is ade2uate for their needs and goals, &owe er0 for the clients wishing a trust to last in perpetuit!0 the trust ma! +e esta+lished or 8sited9 in a /urisdiction state ha ing a+olished the rule against perpetuities, The trustmakers must form their trust according to the laws of that state0 and then compl! with the laws of that state, Esuall! the trust agreement will set forth that its alidit!0 construction0 and administration will +e go erned +! the laws of the particular state chosen, ;. Esta;lis)ing Significant Contacts *it) t)e State *)ere Site>.

The next issue is to ensure that the trust has sufficient or significant contacts with the chosen state, Oftentimes the trustmakers will chose an independent trustee located in the chosen state0 will conduct meetings of the trustees and +eneficiaries in the chosen state0 will open a trust account in the chosen state0 will make in estments in the chosen state0 or will do some other act creating a relationship +etween the trust and the chosen state, c. Co<&lying *it) t)e "a+s of t)e State *)ere Site>.

The onl! pro+lem can +e that sometimes the laws of a particular state will control the status of real propert! within that state, )hat this means is that real propert! located in a state containing the rule against perpetuities will +e go erned +! the laws of that state0 and cannot +e placed indefinitel! in a d!nast! trust, In these situations0 the real propert! should either not +e placed into the trust0 or the trust agreement should contain a perpetuities sa ing clause0 applica+le onl! to real propert!, Another solution ma! +e to place the real estate into an entit! such as a ''$0 and then place the ''$ units into the d!nast! trust,

Dynasty Trusts Estate Planning for Successive Generations Page 7 -3 of -2

Section Si,. Ti<e.

Ma0ing t)e Dynasty Trust *it)stan> t)e Test of

)hile the primar! +enefit of a d!nast! trust is its longe it!0 this can also +e a disad antage in certain circumstances, )hen the trustmakers create a d!nast! trust the! are looking at the current status of the econom! and our societ! +ased on past experiences, O+ iousl! no trustmaker or ad isor can foretell what the future will +ring, There ma! +ecome a time when it is undesira+le to ha e a d!nast trust, )hen and if this e er happens0 the trust needs to +e sufficientl! adapta+le to handle these changes, There are se eral wa!s to +uild this adapta+ilit! into a d!nast! trust, a. !a<ing an Blti<ate Beneficiary of t)e Dynasty Trust.

The trustmakers should name an ultimate +eneficiar! in the e ent that the trustmakers lineal descendants reach an end, )hen the trustmaker names an ultimate +eneficiar!0 it is most often a charita+le institution, ;. Beneficiaries "i<ite> Po+er of #&&oint<ent.

The trustmakers can gi e each successi e generation a limited power of appointment5 that is the a+ilit! to pass their trust share outright to named indi iduals upon their death0 including further trusts, B! using a limited power of appointment the +eneficiar! is a+le to pass that +eneficiar!3s trust share at death without ha ing the trust share included within that +eneficiar!3s gross estate0 there+! eliminating estate taxes on that share, #urthermore0 this power gi es the +eneficiaries and successor trustees the a+ilit! to +est deal with the trust assets +ased on changed circumstances, c. !a<ing Trust Protectors +it) S&ecific Po+ers Bn>er t)e Trust #gree<ent. Another approach is to name independent trust protectors with specific powers under the trust agreement0 including the powers to terminate or amend the trust agreement in the e ent that its perpetual nature is no longer appropriate +ased on changed circumstances, (oreo er0 the trustmakers can use definiti e language to set forth the circumstances when the trust protectors can exercise the powers to amend or modif! the trust,

Section Seven.

#las0a Trusts.

Dynasty Trusts Estate Planning for Successive Generations Page 7 -9 of -2

Do discussion a+out d!nast! trusts ma! +e had without addressing the issue of 8Alaska Trusts,9 The State of Alaska was one of the first states to address the rule against perpetuities and ena+le trusts sited within Alaska to ha e perpetual existence, This legislation was passed in April of %::;, The Alaska statues are trend setting not onl! +ecause of the a+olishment of the rule against perpetuities0 +ut also +ecause of the creditor protection afforded the Alaska trusts, &istoricall!0 a trustmaker could not create a trust within the Enited States wherein he-she was named a discretionar! +eneficiar! and recei e an! t!pe of creditor protection, 1rior to April %::;0 assets in a trust created under the laws of an! state were su+/ect to the claims of the trustmaker3s creditors to the maximum extent the trustmaker was eligi+le to recei e distri+utions in the discretion of a trustee, This was so e en if the transfer to the trust was not in defraud of creditors, $lients wishing to create such a trust0 known as a 8self7settled9 trust0 created their trusts off shore0 in foreign /urisdictions, These trusts are called foreign asset protection trusts or #A1Ts, (an! offshore /urisdictions0 including De is0 $ook Islands and Beli6e0 ha e specificall! enacted legislation to protect self7settled trusts from the reach of a trustmaker3s creditors, An Alaska Trust can +e an effecti e perpetuit! d!nast! trust when a client wishes to make a gift to the trust0 d!nast! protect the gift and !et0 if the pro er+ial sk! falls in0 +e allowed0 in the trustee3s sole discretion0 access to the trust assets for his-her +enefit, a. Creation of an #las0a Trust.

The Alaska State 'egislature has set forth the re2uirements for forming an Alaska trust, In order for a trust to constitute an Alaska Trust0 the following must +e satisfied4 • Some of the trust assets must +e deposited in the State of Alaska and held and administered +! a 2ualified person, 8Deposited9 means that trust assets are held in a checking account0 time deposit0 certificate of deposit0 +rokerage account0 trust compan! fiduciar! account or other similar account located in Alaska, 8Jualified person9 means an Alaskan domiciliar! or Alaskan trust compan! or +ank5 • The 2ualified person3s duties must at least include an o+ligation to maintain records for the trust0 either indi iduall! or together with other ad isors within or outside Alaska0 and the 2ualified person must ha e an o+ligation to prepare or arrange for the preparation of tax returns that must +e filed +! the trust0 either indi iduall! or together with other ad isors within or outside Alaska5 • 1art of the administration of the trust must occur within the State of Alaska5
Dynasty Trusts Estate Planning for Successive Generations Page 7 -' of -2

• The alidit!0 construction0 and administration of the trust are determined +! the laws of the State of Alaska5 and • The trustee of the trust must register the trust in the court in the place where the principal administration of the trust takes place, The effect of the registration is that the trust and trustee are su+mitted to the personal /urisdiction of the courts of the State of Alaska, An ad antage to Alaska3s legislation is that it gi es clearer guidance to a trustmaker as to what acts are necessar! to make the trust sitis 8Alaskan9, 1resentl!0 neither Delaware0 South Dakota0 Idaho nor )isconsin gi e such detailed guidance to estate planners, The primar! ad antage of this guidance is that it gi es a clear indication of what is necessar! to esta+lish a sufficient nexus with the State of Alaska, In other states0 the estate planner is merel! tr!ing to co er his or her +asis and do as much as possi+le to esta+lish a sufficient nexus with that state, The pro+lem is that in states other than Alaska0 the estate planner will not know if a sufficient nexus is esta+lished until the trust comes +efore a court of law, Another +enefit to an Alaska trust is that the legislation allows a foreign trust0 or a trust created in another state0 to mo e its situs to the State of Alaska, The onl! re2uirements for a foreign trust to 8mo e9 to Alaska are that the trust compl! with the statutes go erning the creation of an Alaska Trust and as generall! discussed herein, This gi es estate planners great flexi+ilit! in mo ing a trust to Alaska0 should the! decide to do so after watching the performance of Alaska Trusts during the next se eral !ears, Of course0 it must +e acknowledged that the trusts will most likel! need to +e amended in certain respects +efore the! are mo ed to the State of Alaska0 in order for the trusts to full! compl! with the Alaska statutes, ;. Cre>itor Protection.

The Alaska legislation sets forth in no uncertain terms that propert! in a written and irre oca+le Alaska Trust0 and in which the trustmaker con e!s propert! which the trustmaker cannot oluntaril! or in oluntaril! transfer +efore it is deli ered to the trust0 and under which the trustmaker is a discretionar! +eneficiar!0 is not su+/ect to the claims of the trustmaker3s creditors unless one of four exceptions is met, The four exceptions defeating creditor protection are as follows4 • if the trustmaker retains the right to re oke or terminate all or part of the trust without the consent of a person with an ad erse interest0 such as a +eneficiar! or a creditor5 • if the income and-or principal from the trust must mandatoril! +e paid to the trustmaker5
Dynasty Trusts Estate Planning for Successive Generations Page 7 -/ of -2

• if the trustmaker created the trust at a time when the trustmaker was in default +! 3B da!s or more under a child support /udgment or order5 • if the trustmaker created the trust with the intent to hinder0 dela! or defraud creditors under the Alaska fraudulent transfer law, Again the legislation gi es clear guidance as to what are considered permissi+le transactions under the law, These statutes gi e the estate planner a er! plain roadmap to follow when creating the Alaska Trust0 and do so in such a wa! that er! little is left for interpretation, Another +enefit to the Alaska Trust is that in all likelihood the courts will look with fa or upon trusts created under the Alaska statutes, 1art of this fa ora+le treatment most likel! stems from the 8anti7#A1T9 reporting pro isions of the Internal =e enue $ode will not appl! to the Alaska Trusts due to Alaska3s rule against fraudulent transfers0 Alaska3s long statute of limitations0 and the fact that assets in an Alaska Trust would +e su+/ect to the /urisdiction of ES courts were there an inappropriate Alaska Trust, c. Duration of an #las0a Trust

)hile an Alaska Trust stretches out the time that trust assets can +e held in trust0 there is e en a limit on the duration of an Alaska Trust, The Alaska State 'egislature limits the life of a trust to one of the following4 • no later than C% !ears after the death of an indi idual identified in the trust >traditional rule against perpetuities?5 • • >. within ninet! >:B? !ears after the creation of the trust5 or after the death of the last person identified in the trust0, Pro;le<s +it) an #las0a Trust.

The primar! pro+lem with an Alaska Trust is that it is relati el! untried, )hile it is true that the Alaska Trust Act has +een in effect since %::;0 there ha e +een relati el! few attempts to test the effecti eness of an Alaska Trust, Therefore0 the careful planner recommending an Alaska Trust at this time needs to also make his clients aware of the relati el! new nature of the Alaska Trusts, &owe er0 estate planning practitioners can expect to see the first few legal attempts to defeat an Alaska Trust widel! pu+lici6ed, B! irtue of the fact that
Dynasty Trusts Estate Planning for Successive Generations Page 7 -( of -2

these trusts are 2uite new ma! compete somewhat with #A1T ehicles0 it can +e expected that the #A1T practitioners will +ring attention to an! tests of an Alaska Trust, In the mean time0 howe er0 the rest of us will ha e to wait and watch to see if Alaska Trusts will trul! withstand the test of time,

Dynasty Trusts Estate Planning for Successive Generations Page 7 -2 of -2

Dynasty Trusts Estate Planning for Successive Generations Page 7 -8 of -2

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close