Dynasty Trusts Split
It is likely existing dynasty trusts would remain exempt from the proposed legislation and would be unaffected by the limitation. However, existing dynasty trusts could lose this protection if gifts are contributed after the new legislation is enacted. Making gifts after the new law is effective may also split the dynasty trust into two new forms: a dynasty share and a limited term share.
Solution: Life Insurance Trusts
How can those who have formed dynasty trusts protect their contributions? As an alternative for future gifts, contribute to an established irrevocable life insurance trust (ILIT) instead. Contributing gifts to ILITs prevents the terms of dynasty trusts from being altered by the new proposed law. The majority of ILITs are exempt from GST tax, a generation-skipping tax that affects certain distributions and transfers of dynasty trusts. By choosing a life insurance trust as an alternative and leaving dynasty trusts unchanged, the new legislation will not affect the dynasty trust and trust holders can avoid the GST.
Benefits of Dynasty Trusts
When properly structured, a dynasty trust provides wealth and tax savings for future generations as well as protection from creditors. Not every state allows dynasty trusts; persons in states that do not can establish dynasty trust in a state that does by using a corporate trustee in that state. See an estate planning attorney to see if a dynasty trust makes sense for your family.