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 comprehensive wealth planners, we are often asked “How
do I protect the assets that I have earned from being lost to death
taxes, from long-term care expenses and from the costs and inconvenience
of probate? How do I prevent my children from losing these assets
after my death to divorce, disability or debt?” An increasing
popular answer to these questions is the use of a special type of
revocable living trust commonly called a “Dynasty Trust”.
In January of 2006 the exemption for individuals from federal
estate taxes will increase from $1.5 million to $2 million. At the
same time the generation skipping taxes exemption, which applies
to assets left in trust for the benefit of children, grandchildren,
great grandchildren, and beyond, will also increase to $2 million
per taxpayer. As a result, a married couple can effectively set
aside in trust up to $4 million after their deaths, (and more in
future years), for the benefit of their children, and their children’s
children, if they choose.
Does a dynasty trust mean that your children or your grandchildren
will lose the use the assets left in trust for their benefit? Absolutely
not. A properly drafted dynasty trust will normally provide that
all of the income of the trust will be distributed to your children,
then after their deaths, to your grandchildren. In addition, the
principal of the trust can be used for health, support, maintenance
and education of your children and your grandchildren. Moreover,
current IRS rules permit the beneficiary to withdraw up to 5% of
their trust principal annually for any purpose, without the trust
being considered as part of their estate when the beneficiary dies.
Finally, we often include in a dynasty trust a special provision
known as a “power of appointment,” giving the beneficiary
specific authority to specify in his or her will how the assets
in the trust will pass to their children or grandchildren. The assets
can remain, however, in the trust indefinitely for the special needs
of a disabled child or grandchild or other beneficiaries.
I am often asked, “Is there any good reason why an individual
should not consider a multi-generational asset preservation dynasty
trust to protect the family assets? The answer is, in most cases,
“No.” Moreover, you can name your children as trustees
on a dynasty trust so that the children actually control the trust;
yet they do not own it. So, if a child ever becomes the subject
of bankruptcy proceedings, divorce, or if the child has a special
disability or lives in a nursing home, those assets in that child’s
share of the dynasty trust are protected and preserved.
When reviewing your estate plan with your elder law attorney, estate
planning counsel or financial advisor, ask for an explanation of
the pros and cons of using a dynasty trust to protect your assets
for yourself and the next generation.
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 comprehensive wealth planning, asset preservation and elder law
and is a certified elder law attorney by the National Elder Law
Foundation. For information on his certification you may contact
the Foundation at (520) 881-1076.
11/07/05
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