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| Pay It Forward |
The Lure of Dynasty Trusts
Michael Sisk
12/01/2003
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The GSTT is a tax separate from and incremental to the estate tax. The GSTT is assessed on any transfers (lifetime or testamentary) that skip a generation (i.e., grandparent to grandchild) at the maximum estate tax rate, currently 49 percent. There is some relief: Congress included a significant exemption to the tax. Each person has a GSTT exemption of $1 million, which means he or she can transfer (during life or at death) up to $1 million without any GSTT. In 2004, the estate tax and GSTT exemptions will increase to $1.5 million for testamentary (at death) transfers but are staying at $1 million for lifetime transfers.
"When you tell a
client that you can design a trust
that shields their children,
grandchildren, and great-grandchildren from creditors and pouses, that’s all
many of them have
to hear, and they say,
‘I want that.’" |
A successful dynasty trust will exploit the tax exemptions of its founder as much as possible. Yet this becomes a significant challenge when substantial wealth is involved because of the $1 million lifetime tax exemption for both gift/estate-tax and Generation-Skipping Transfer Tax purposes. For those seeking to shield greater sums in a dynasty trust, two popular techniques exist to help maximize tax savings.
The first is an irrevocable life insurance trust (ILIT), which purchases life insurance on the individual establishing it. That person will gift cash to the trust equal to the insurance premium payment. The trust then makes the premium payments and collects the death benefit free of the estate tax and the GSTT. The benefit comes from the fact that the founder is taxed on the premium amounts paid into the trust, and not on the death benefit. By making the ILIT a dynasty trust, the tax savings are further enhanced because the death benefits are not taxed in the children’s or grandchildren’s estate.
"It’s all done in and around the issue of leverage," explains Malcolm Sklar, area president for GBS, an insurance and financial services company. He points to the fact that in 2003, a 65-year-old man can purchase a $3.33 million guaranteed death benefit for $1.1 million. "Imagine the rate of return on that. You can build up family wealth incredibly." Though, he concedes, to do that beneficiaries must give up access to the principal—a concession not all will be willing to make.
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