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Bequeathing a large amount of money to multiple generations of your family has long been a controversial issue; but this approach to wills and trusts is suddenly getting more popular.

The 2010 Tax Relief Act made it possible to fund $5 million-plus trusts per person without incurring as big a tax bill as in the past. That has been encouraging the creation of large “dynasty trusts,” or trusts for the benefit of multiple generations.

The tax code helped by raising the exemptions for the gift tax which was a levy generally applied when wealth is transferred to relatives or other beneficiaries. The exemption for each of those taxes was raised to $ 5,000.000.00. In 2012, these exemptions are further adjusted for inflation and this exemption now, in 2014, is $ 5,340,000.00 per person. The previous exemptions were much more restrictive, making it more costly to fund trusts large enough to benefit descendants well down the road.

Couples who have not utilized their gift or GST tax exemptions can now shelter $ 10,680,000.00 in 2014 from transfer taxes for several generations.

The key to a trust’s longevity is that it must be located in a jurisdiction that does not limit how long a trust can last. Approximately half the states have such favorable laws, including Delaware, Alaska, Florida, New Jersey and Nevada.

There were some rumblings that Washington might eventually place limits on the length of dynasty trusts. A 90 year limitation was discussed but never approved.

The increased gift-tax exemption, meanwhile is utilized in establishing the Dynasty Trust (also called Grantor Trust). One of many methods of funding the trust, is to purchase from the grantor an asset expected to appreciate in value, such as an interest in a closely held business or real estate, or a stake in a company that may become subject to a public offering. The grantor receives a promissory note, which the trust pays off with the cash flow of the asset. The grantor pays no capital-gains tax, and the trust is left with a valuable appreciating asset. Another method is to make a gift to the Trust utilizing the previously mentioned gift tax exemption.

As estate planners, we urge creating Dynasty Trusts sooner rather than later simply because the sooner you transfer assets from your taxable estate to a trust, the better off both you and your heirs will be.

There is always political uncertainty about the exemptions: Will the $ 5,340,000.00 exemption amount really be permanent?


Tarta Law Firm NJSteven W. Tarta, Esq. brings more than 45 years of professional experience to his practice, with a sophisticated focus on Estate Tax Planning, Living Trusts and Elder Law.

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