Protecting Large Estates From Estate Tax in Ventura
Trusts are very useful, flexible tools to hold assets. They allow for management of assets during your life, upon your incapacity, and for the continued management of the assets after your death. Perhaps you’d continue to hold the assets in trust until your children reach a suitable age to manage the money for themselves, like age 25 or 30. But you could keep the assets in trust even longer. You could keep the assets in trust for the lives of your children, and your children’s children, and so on.
These trusts, sometimes called “Dynasty Trusts” continue for the longest possible time allowed by law. Some states have a “Rule Against Perpetuities.” The Rule in common law says that the asset must vest, if at all, no later than 21 years after the death of a “life in being” when the trust became irrevocable, typically the death of the grantor of the trust. In jurisdictions with the common law Rule Against Perpetuities, you could have the assets in the trust and then at your death, you’d look around and see who is the “measuring life.” Typically, the measuring life is the living beneficiaries of the trust, like your children and grandchildren. The trust must distribute within 21 years of the death of the last of them to die. Let’s say at your death your grandchild is 4 and lives until their 104th birthday. The trust can continue until 21 years after that. So, the trust could continue 121 years in that case.
Many states have adopted the Uniform Statutory Rule Against Perpetuities, which allows a trust to last either the traditional Rule Against Perpetuities period (a “life in being” plus 21 years) or 90 years, if longer. Some states have modified the Rule so that a trust might last 150, 365, or even 1,000 years. Some states have completely repealed the Rule so that a trust could last forever!
Why might you want to keep your assets in a trust that long? First, you can have professional management of the assets to make sure the assets aren’t squandered by the beneficiaries and make sure the assets are distributed in the manner you’ve chosen even long into the future.
Next, a Dynasty Trust can save on taxes for those with a taxable estate. Let’s look at a quick example:
John (age 80)(1st generation) dies and leaves $5 million to his daughter, Sally (age 50)(2nd generation), outright. Sally lives another 30 years and the $5 million grows at 7.2%. The $5 million turns into $15 million by Sally’s death. Sally was a prudent investor and had a taxable estate in her own right even before inheriting from John. Therefore, the inheritance from John and the growth on it are all taxed at the estate tax rate, which is currently 40%. Sally’s estate pays $6 million of estate tax on the money and Sally leaves the $9 million inheritance to her child, Beth (3rd generation), who’s also very savvy with investments and has a taxable estate in her own right. Beth lives another 30 years and the $9 million she inherited from Sally triples to $27 million. Beth’s estate pays an estate tax of 40%, or $10.8 million. Beth leaves the inheritance to Josh (4th generation), who invests similarly. So, the $10.8 million he inherits grows to $32.4 million and his estate owes tax of $12.96 million, leaving $19.44 million for future generations. So, by the end of the 4th generation, the $5 million inheritance from John has grown, after transfer taxes, to $19.44 million in 90 years. That’s not bad, it’s nearly quadrupled.
But there is a better way. If at his death John (1st generation) left the $5 million to a Dynasty Trust for the benefit of Sally (2nd generation) and her descendants and allocated his GST exemption, the assets wouldn’t have been included in Sally’s estate. At Sally’s death, the $15 million wouldn’t have faced a 40% reduction due to the estate tax. Instead, the full $15 million could have continued to grow for the benefit of Beth (3rd generation) and her descendants. After 30 more years it would have tripled to $45 million and at Beth’s death, it wouldn’t have been reduced but would have passed to Josh without further estate taxes. After another 30 years of prudent investing by the 4th generation, the inheritance would have grown to $135 million.
Without a Dynasty Trust in Ventura, CA, the assets increased by 4x. However, with a Dynasty Trust, the assets went up by 27x over the same period of time and with the same investment assumptions. While a Dynasty Trust isn’t for everyone, it can have some transfer tax advantages for those with a taxable estate.