Three Reasons to Consider a Different Type of Trust in Your Estate Plan

Trusts

KEY TAKEAWAYS

  • Generation Skipping Trusts also sometimes referred to as Dynasty Trusts, provide more flexibility than a typical will or trust, including the ability to change beneficiaries at a later date.
  • Instead of liquidating a trust during the initial beneficiaries’ lifetimes, a trust can be sustained for future generations.
  • Look for trust structures that protect beneficiaries from lawsuit or divorce claims, can skip generations when tax-advantageous to do so, and provide long term security for heirs.

 

WILLS AND TRUSTS

With the holiday season upon us, thoughts turn to lights, caroling, celebrations and gift-giving with co-workers, friends and relatives. However, for many families, the holidays are also a time to have those difficult inter-generational conversations about estate planning—or lack thereof. Sound familiar?

Unlike many Americans, most of you have wills in place and know that a will generally establishes a trust for children and young beneficiaries upon the death of the parents or the individuals who established the will. You may also know that a trustee is responsible for administration of the trust which provides provisions for support of the beneficiaries and may allow for payment of certain large expenditures such as a purchase of a home. Many trusts then detail a specific timetable for the liquidation and distribution of assets to the beneficiaries that is based on the beneficiaries reaching certain ages. For instance, the trust could be structured so the beneficiaries would receive 50 percent of the assets at age 30 and the remaining 50 percent at age 40. The premise of this structure allows one’s assets to be managed appropriately until the beneficiary has reached a reasonably mature age in his or her life.

 

GENERATION SKIPPING TRUSTS

Age-based distributions are an ideal structure for an estate, but there are better alternatives for many families. Instead of liquidating the trust during the initial beneficiaries’ lifetimes, the trust could be sustained for future generations, such as the beneficiaries’ children or other directed beneficiaries. These trusts are generally called Generation Skipping Trusts or sometimes referred to as Dynasty Trusts with the following benefits:

  1. Assets in the trust are protected from creditor claims that may arise during the beneficiary’s lifetime such as claims from lawsuits or divorces.
  2. Assets skip the estate of the initial beneficiary and therefore may avoid federal or state estate taxes at their level.
  3. Generation Skipping Trusts provide long-term security for your family and maximize the assets that your heirs receive.

So what exactly are Generation Skipping Trusts?

A Generation Skipping Trust is a long-term trust designed to pass wealth from generation to generation without incurring transfer taxes such as estate and gift taxes. In the state of Washington, these trusts can last 150 years.

There is also a fair amount of flexibility within Generation Skipping Trusts, including the option for the beneficiary to be the trustee and the ability to select or change a future beneficiary if allowed to do so within the trust document.

Although many wealthy individuals who have estates that are subject to federal estate tax use Generation Skipping Trusts, you and your beneficiaries don’t need to have a federally taxable estate in order to consider such trusts for your estate plan. As discussed above, such trusts provide protection from creditor claims, which is a significant benefit. Also keep in mind, the state of Washington has a much lower estate tax exemption ($2,079,000 per person in 2016) as compared to the federal exemption which is $5,045,000 per person. So if your beneficiaries are financially successful, they may have a future estate tax and at least a portion of that tax could be avoided by leaving assets to them in a trust.

 

INHERITANCES

One other estate planning consideration pertains to any inheritances you will receive. Would you be better off receiving this inheritance in a long-term multi-generation trust? Although these discussions may be difficult to have with your parents, it might be prudent when you consider your estate valuation and financial situation.

 

SPECIFIC PLANNING FOR YOU

Generation Skipping Trusts may or may not be right for your estate plan. If they are, there are a variety of issues to consider. We work closely with our clients and their estate attorneys to make sure the right provisions for each client’s specific situation is established under the trust and we can help with the future funding and administration of the trust. Please contact us if you have questions about how this type of advanced estate planning can help you and your family preserve your hard-earned wealth and provide peace of mind for your family and future generations.

 

Todd Flynn, CPA, CFP ® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.