It was recently pointed out to me that in my 2018 article - “Who Gets the Family Camp?” I neglected to talk about Dynasty Trusts and the role they can play in preserving a family’s treasured places. That place could be the family camp or it might even be a farm… as cited in my example below.
A Dynasty Trust is a long- term trust that can last into perpetuity created to pass wealth through generations without incurring transfer gift taxes, estate taxes, or generation-skipping transfer taxes while the asset remains in the trust. Historically, Dynasty Trusts could only last for 21 years after the death of the last beneficiary of the trust. Twenty-four states, including Maine, abolished the rule against perpetuities. A Dynasty trust typically starts out as a grantor’s trust, and upon the death of the grantor, becomes irrevocable and a separate entity that files its own tax return.
Typically, Dynasty Trusts were used to avoid paying estate taxes with each succeeding generation - only requiring taxes to be paid on the donor’s estate if the estate exceeded the limits. In 1999, the Federal Estate Tax Exemption was $650,000 per individual – in 2020 the limit is $11,580,000 per individual and with proper planning a couple can pass $23,160,000 in assets without paying federal estate taxes. The need for a Dynasty Trust to avoid paying federal estate taxes is now limited to higher net worth individuals, though that can change depending upon the political climate. If there are no adjustments to the current law, then the federal estate tax exemption reverts to $5,490,000 in 2026. In Maine, the 2020 state estate tax exemption is $5,800,000 which is considerably lower than the federal rate.
So why use a Dynasty Trust? The best assets to place in a Dynasty Trust are those that do not generate income – such as non-rental property including a family camp. The trust can provide a framework under which the camp can be passed from one generation to the other indefinitely. Some of the downside to that is as generations continue to expand – how does the property get used so that all have access? The donor needs to work with a qualified attorney and discuss the terms of the trust including looking into the future and how the trust will function for generations.
Arnold Bunker’s farm on the coast of Maine in Brunswick has been in the family for generations. It was recently valued at $5,000,000. There is a desire for it to be retained in the family indefinitely, but other than the farm, the family assets are limited. If Arnold dies today and transfers the farm into a Dynasty trust upon his death, then there would be no estate taxes due to either the state or federal governments. If left outright to his only child Wilbur, and the property continues to appreciate and is worth $10,000,000 in 2026 at which time Wilbur dies in an accident, then there would potentially be both federal and state estate taxes due on the transfer of the cottage to the Wilbur’s son Chester (Arnold’s grandson) due to the federal limit reverting to $5,490,000 and the state limit being at $5,800,000 (the current rate). Without the assets to pay those estate taxes, the family farm might have to be sold because Chester’s chicken business has not allowed him to accumulate the funds needed to pay those estate taxes.
Planning for the future which includes estate planning is something that we need to continually review and adjust. Rules and dollar limits for estate and income tax rates continue to change with each election cycle. The current federal estate exclusion amount of $11,580,000 per individual is set to expire in 2025 and revert to $5,490,000 in 2026 unless there are updates made and with the current deficit it may be difficult for future administrations to allow the exclusion to increase. It may be prudent for you to utilize a trust and the current exclusion now to achieve your goals of retaining a property or asset in the family for the future. As always, seek the advice of a knowledgeable attorney.
Content in this material is for general information only and not intended to provide specific or individualized legal or tax advice. Golden Pond Wealth Management and LPL Financial do not provide legal/tax advice or services. All examples are hypothetical and are for illustrative purposes.