If you are concerned that estate tax exemption amounts may go up in future years, and you have an estate that exceeds those likely amounts, one of the primary objectives you will have when planning your estate will be to reduce the taxable value of your legacy for future generations, and the creation of a dynasty trust is a good way to do this. There are a number of different trusts that are useful under various sets of circumstances, and they can be utilized either independently or in tandem with one another. Aside from tax efficiency, trusts can also provide asset protection because the contents of the trust are not technically yours, so claims against you from a former spouse or as a result of some type of judgment can’t target the assets in the trust.

One form of trust that can be a good solution for many people is the Generation Skipping Trust or GST. With these instruments you skip a generation, naming your grandchildren as the beneficiaries rather than your children. The value of the assets that you used to fund the trust are removed from your estate for estate tax purposes. But when they are transferred to your grandchildren upon the death of your children this transaction is not subject to the estate tax. The generation skipping tax would only be applicable if the value of the trust exceeded the generation skipping tax exemption, which will be about $1.3 million in 2013 under current law.

Though your grandchildren are the ultimate beneficiaries of the generation skipping trust, your children can benefit from the income that the trust earns throughout their lives, receiving cash distributions and using property that is held in trust. Through what is called a special power of appointment your children can even supervise the disposition of trust assets. So your children can gain benefits and even control, but they assume no personal ownership so the assets in the trust are immune to judgments against them.

Tags: Estate Planning, Generation Skipping Trusts, Inheritance Planning