Life insurance trusts today have lost some of their allure with the raising of the federal estate tax exemption amount. However, a specific type of life insurance trust can have much more than just tax advantages – advantages that last for generations.
Most of us have read stories about the dissolution of family wealth over a generation or two. This can occur for several reasons, mostly because the family capital is not replenished because of bad business decisions or personal financial mistakes. There is a tax-advantaged vehicle that can leverage the current high tax exemptions for high net worth clients, but it works just as well for those whose assets would not be subject to federal estate taxes.
A dynasty trust is a vehicle that can pass on and control wealth for many years, and with proper management, the trust assets can be replenished to provide continuing family capital for generations to come.
A dynasty trust can last as long as allowed under the state law where it is established, though trust language will also have a bearing. In South Dakota (home of the Life Insurance Trust company), the trust can exist for an unlimited duration.
Trust documents must be carefully crafted to take advantage of all the benefits offered, but there are many. Dynasty trust creators will use their generation-skipping transfer tax (GSTT) exemption ($11.4 million per taxpayer and $22.8 million per married couple in 2019) to gift to a trust with gifts used to purchase life insurance that dramatically leverages the value of the contribution to the next generations.
As long as the GSTT exemption covers all the lifetime gifts made to the trust, all trust assets, including the death benefit from the life insurance, will be exempt from generation-skipping transfer taxes, and if the ILIT is drafted and administered correctly, the death benefit proceeds should be free from income and estate taxes also.
The use of a dynasty trust can allow family assets to grow protected from creditors and lawsuits, as well as former spouses. The ability to control the distributions of assets can also limit the chances they will be squandered by future generations. The vehicle allows the grantors to control the assets from their grave.
Some advisors refer to this technique as a family bank, and one of the true benefits of a dynasty trust is the discussion that opens up between generations as it relates to the passing down of not only family wealth, but family values and goals. The use of a dynasty trust points out the grantor’s hopes for the potential of the family going forward – potential that does not center around money alone, but the opportunity and security that money can bring.
The creation and management of a dynasty trust should involve estate planning and life insurance experts. If you are interested in taking advantage of its benefits, talk to your estate planning attorney or advisors. If you decide to move ahead and create this type of trust, reach out to the Life Insurance Trust Company by contacting Leon Wessels at firstname.lastname@example.org or 605.574.1703.