Estate Planning Article

Dodging The Dreadful D's: Debt, Divorce, Disability and Death Taxes

Using a Dynasty Trust to protect your estate and your assets and those of your children from disability, divorce, death taxes, and debt

By: Joseph T. “Chip” Buxton III, J.D., C.E.L.A.*

As estate planners, we are often asked, “How do I protect the assets that I have earned from death taxes, from the costs and inconvenience of probate? How do I prevent my children from losing these assets after my death to divorces, disability, or debts?” The best answer to these questions is a special type of Revocable Living Trust commonly called a “Dynasty Trust”.

On January 1, 2011 the exemption for individuals for federal estate taxes was set at $5M. At the same time the generation skipping tax exemption, which applies to assets left in trust for the benefit of grandchildren, great grandchildren, and beyond, also increased to $5M per taxpayer. As a result, a married couple can effectively set aside in trust up to $10 million after their deaths, for the use and benefit of their children, and their children’s children. BEWARE, however, this exemption will expire at the end of 2012, and, unless congress extends the law, the exemption drops to $1million per taxpayer. Yet taxes are not the main reasons for setting up a Dynasty Trust. You can also protect your children’s inheritance from their debts and divorces.

Does a Dynasty Trust mean that your children or grandchildren will lose enjoyment of the assets left in trust for their benefit? Absolutely not. A properly drafted Dynasty Trust normally provides that all trust income be distributed to your children, and then after their deaths, to your grandchildren. The trust assets can be used for health, support, maintenance and education of your children and your grandchildren. Finally, you can name your children as trustees on a Dynasty Trust so each child actually controls his or her trust. In addition, we often include in a Dynasty Trust a special provision known as a “power of appointment”, giving each child specific authority to specify in his or her will how the assets in the trust will pass to their children or grandchildren. In other words, the assets can remain in the trust indefinitely for the needs of a child or grandchild or other named beneficiaries.

“Is there any reason you should not consider a multi-generational asset preservation “dynasty” trust to protect the family assets?” The answer is, in many cases, “No.” A child can manage his or her own trust. Yet if the child ever becomes the subject of bankruptcy proceedings, death taxes, debts, divorce, or if the child has a special disability and ends up in a nursing home, those assets in that child’s Dynasty Trust may be protected and preserved.

When revising your estate plan, ask your advisor for an explanation of the pros and cons of using a dynasty trust to protect your assets for family and future generations.

*Joseph T. “Chip” Buxton, III is the founding director of the Joseph T. Buxton III, PC, a Virginia law corporation with offices in Yorktown and Urbanna, Virginia. He concentrates his practice in estate planning, wealth management, asset preservation and elder law and is a Certified Elder Law Attorney. For information on his certification you may contact the Elder Law Foundation at (520) 881-1076.

Updated 9/8/2011