It's true that you can't take it with you, but many are becoming more concerned about what happens to what they leave behind. Thanks to some recent changes in estate laws, strategies that were once only doable by the extremely wealthy are now more accessible by those of more modest means. Read on to see if you can take advantage of these estate planning tools and create a living legacy for your family.
Wealthy families have long used various trusts to increase their fortunes and help shield their assets from excessive taxes. States limited how long these trusts could last, making the managing of these fortunes costly and difficult. But thanks to the actions taken by several states to remove time limitations, now you can create a dynasty trust that can last forever.
Dynasty trusts have several main advantages. Primarily, they keep your hard-earned nest egg from being eroded by estate taxes. Normally, wealth transferred from generation to generation is subject to estate taxes. Over time, large portions can be lost to taxes. This money is preserved in a dynasty trust.
They also protect your assets from creditors, bankruptcy and divorce proceedings. For instance, let's say your son is a doctor and you leave him a large inheritance. Should he be sued by a patient, those assets couldn't be touched by the plaintiff if those assets were in a dynasty trust. The same would be true if that son got a divorce. His ex-wife wouldn't be able to demand a share of the assets in the trust.
We've all heard of the problems with trust-fund kids, where the vast wealth left to them takes away their incentive to achieve their own success. That is easily prevented using incentives to encourage your heirs in ways that match your morals and values. For instance, you can withhold funds until a grandchild has earned a college degree.
Dynasty trusts are best suited for those who have at least $500,000 to $1,000,000 in excess of what they need to continue living comfortably. They cost between $5,000 and $10,000 to create and professional trustees usually charge about 1% a year to mange them.
You don't have to have a million bucks in cash lying around. Real estate, such as rental property, personal residences or vacation homes can be put into these trusts. When planned in advance, they can be set up at your death which allows the use of life insurance to fund the trust. The use of life insurance places these trusts within the reach of many people.
These trusts can last for hundreds of years, so it's important to write them as carefully as possible. These trusts cannot be changed so they need to be carefully planned. Provisions to change trustees and end or split the trust should be included to allow future generations flexibility to deal with changing laws and situations.
The income from the trust can be paid to beneficiaries each year. In that case, the income is taxed based on each beneficiary's tax bracket. Any income not distributed from the trust each year is taxed at the trust level where tax rates could be higher.
Dynasty trusts can benefit heirs in many ways. For instance, the trust could own personal residences or vacation homes for the heirs. This provides them a financial benefit, but since the properties are owned by the trust they are beyond the reach of the heirs creditors. This protects those assets for future generations.
If your own children don't have a need for your assets and you want to pass them on to your grandkids and beyond, dynasty trusts allow you to do that without being subject to generation skipping taxes. If you don't want to see your hard-earned wealth eaten away by Uncle Sam, a dynasty trust could be just the ticket. So even though you can't take it with you, you can help provide for generations to come and even pass on some of your values as well.
An Estate Planning Attorney who has experience designing Dynasty Trusts should be consulted. He or she will be able to answer specific questions and help you decide if a Dynasty Trust is right for you.
Questions? Concerns? I'd be happy to provide clear, unbiased advice free of charge.
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Mr. Voudrie is a Certified Financial Planner and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. For more information call 1-877-827-1463 or email jeff@guardingyourwealth.com.
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