By: A.J. Cook

How regal - and rewarding-can a dynasty trust be?

If passing your fortune to many future generations appeals to you, consider adopting a dynasty trust. This trust can last forever without being eroded by federal gift or death taxes. Your heirs, for unlimited generations to come, will be grateful to you, their great, great ad infinitum, grandparent.

Such a trust instrument can be a part of your will or it can be effective now. It can say the trustee should give the beneficiary only the trust income. Or another amount can be distributed on special occasions such as graduating from college, entering the missionary field or becoming an artist.

To qualify for the Dynasty trust, you have two concerns:

• Gift and estate tax exemption amounts.
  
• State laws on long-term trusts.
  

Tax exemption. By contributing no more than the exemption amounts, you avoid gift and death taxes. The following are federal taxes to consider: One is the basic gift and estate tax, and the other is the generation skipping tax, which generally hits people who skip one or more generations with gifts or bequests. So, a gift or inheritance going to a grandchild might trigger this generation skipping tax. You can, however, transfer slightly more than $1 million (over $2 million if you're married), the exemption amount, into the trust without any federal tax.

Some people think the federal death tax will die in 2010. Don't believe it. The United States will always have estate taxes-bank on it.

Your tax advisor should check on your state taxes to learn the exemption amount. Some state exemptions are the same as the federal, but not all. Tennessee for example, allows a gift exemption of only $10,000 per donee per year.

State Laws on Long-term Trusts. Some states prohibit dynasty trusts. They call it a rule against perpetuities. They inherited the rule from the British. Their parliament was concerned that keeping property in a family would limit commercial development of real estate and create family dynasties. It wanted to limit dynasties to their monarch's family.

States that now largely allow long-term trusts include Alaska, Arizona, Colorado, Delaware, Florida, Idaho, Illinois, Iowa, Maryland, New Jersey, South Dakota and Wisconsin. Check the laws of these states for rules and time limits. Alaska, for example, limits trusts to 1,000 years - that may be long enough for most of us. More states continue to be added to these in allowing long-term trusts.

Even if you don't live in one of these states, you can have the advantage by selecting a trustee located in one of them. The trustee can be an individual or an institution. Because institutions live longer than people, a bank or other financial organization might be the more practical choice.

The moral: A dynasty trust is a safe way to avoid deadly taxes.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.

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Released 08-27-01