Wealth Preservation and Trust Planning

Many clients come to us with these objectives:

  • Keeping control of their wealth during their lives;
  • Protecting their wealth from creditors while they’re alive;
  • Protecting their wealth from creditors and failed marriages as it passes to their children and heirs;
  • Minimizing estate taxes on their wealth when they die and, successively, when their children and heirs die;
  • Providing incentives and conditions relating to their children and heirs receiving wealth;
  • Creating an organized plan for their children to manage and administer their wealth;
  • Creating a legacy for their families and their communities;
  • Retaining some flexibility to change their planning in certain ways if they so desire; and
  • Accomplishing these goals most efficiently and cost effectively.

Traditionally, most estate planning has involved transferring wealth to children directly or distributing it from trusts at particular ages, thus potentially exposing it to claims of creditors and divorcing spouses and subjecting it to estate taxes on the deaths of children and future generations. We take a more modern approach and typically plan “multi-generationally” with some type of “dynasty trust” that has the following characteristics:

  • A trustee distributes income and principal on a totally discretionary basis, rather than being mandated by a standard that causes the trust’s assets to be exposed to claims of creditors and divorcing spouses;
  • A beneficiary can be given a power to “re-write” the trust for future generations with a “special power of appointment”;
  • The trust can continue perpetually for the beneficiaries’ lifetime and then transfer to successive generations without being diminished by claims of creditors, divorcing spouses or inheritance taxes;
  • When the ages of projected maturity are attained, instead of receiving mandated outright distributions, each child or other future descendant is put in control of his or her own trust; and
  • Rather than making distributions to a beneficiary who might then acquire assets, assets (including a business) can be acquired as an investment of the trust.

Dynasty Trust Advantages.

There are many advantages that may be realized from creating a dynasty trust, including the following:

Creditor Protection. No one wants to see his or her hard-earned money taken by the creditors of a beneficiary. When a dynasty trust becomes irrevocable, trust beneficiaries’ have an extremely difficult, if not impossible time, attaching trust assets. By having the trust acquire assets desired by the beneficiaries, instead of giving the beneficiaries the funds to buy these assets outright, the additional assets will receive the same creditor protection as the existing assets in the trust.

  • Failed Marriage Protection. In addition to protecting the assets from creditors, a dynasty trust protects the assets from beneficiaries’ failed marriages. Since the trust owns the trust assets and the decision as to whether or not a beneficiary receives distributions from the trust is discretionary, a divorcing spouse of a beneficiary is unable to attach the trust assets and they are not subject to division by a divorce court. In addition, a spouse referenced as a beneficiary can be described as someone to whom a descendant beneficiary is married and with whom the descendant is living.
  • Beneficiary Management and Control. Because the creator of a trust, the “grantor”, can dictate its terms, a trust can be designed in a way that is attractive to the beneficiaries, with broad investment powers and unrestricted use and enjoyment of the trust assets. The key concept is that the trust grantor can literally dictate the rules. In addition, a beneficiary may be given a broad special power of appointment to amend the trust to adapt to changing circumstances such as family situations or tax or other laws. Therefore, contrary to the general belief that a trust is a tight, inflexible, and restricted undertaking, there is great flexibility in the beneficiary-controlled trust arrangement because particular beneficiaries can have virtually unlimited amendment power. Most traditional trusts distribute the assets when the beneficiary reaches a certain age or ages, with the last distribution terminating the trust. According to modern trust theory, assets held in a trust are far more advantageous and greater in value than if those same assets were held outside a trust because of the protection they enjoy against creditors. Thus, instead of terminating at certain ages, or upon a beneficiary’s death, the beneficiary-controlled trust continues perpetually with the next succeeding primary beneficiary being placed in full control at the proper time.
  • Beneficiary Guidance. A dynasty trust also allows a trust grantor to give guidance to the trustee, if so desired, about how to allow a beneficiary to use trust assets and income from them. If the grantor is worried about a beneficiary’s ability to handle finances in a responsible or effective manner, the grantor may place conditions and/or incentives in the trust agreement relating to trust distributions.
  • Continuity of Estate Planning. A dynasty trust can enable you to have a comprehensive scheme of planning running for consecutive generations, alleviating some planning concerns about how assets will be managed by successive generations. If you want to keep your property within your bloodlines, dynasty trust planning is very effective.
  • Reducing or Eliminating Estate Taxes. Transferring assets to successive generations without having Federal inheritance taxes diminish them is an incredible advantage of a dynasty trust. Since assets held in the trust are not transferred at the death of each beneficiary, but rather remain in the trust for the benefit of successive generations of beneficiaries, there are no transfers of wealth between generations. If the trust is structured properly, there will be no transfer of wealth between family members, and the assets will only be taxed when, if ever, they are transferred out of the trust. With proper planning, after the grantor transfers the assets and designates them as exempt under the generation skipping transfer tax exemption, the assets and all income and appreciation attributable to them are not taxed to successive generations.
  • Income Taxes. The trust grantor has an opportunity to decide whether to have the trust itself pay income taxes or to structure the trust so that either the grantor or a beneficiary pays taxes on income generated by the trust. This payment of taxes by the grantor can be a way to increase the ultimate size of the trust since the assets in it will not be reduced by taxes. In effect, the grantor’s tax payments are additional gifts to the trust as the trust is not required to pay the taxes.