Dynasty Trusts: A Tax-Efficient Way to Pass Generational Wealth

My Jacksonville clients often are looking for effective ways to pass wealth to future generations while minimizing tax burdens. One powerful tool in estate planning that addresses these concerns is the dynasty trust.  In this article, we’ll explore what a dynasty trust is, its benefits as they relate to taking advantage of the current high estate and gift tax exemptions, and some considerations to keep in mind for your own estate.

Navigating the Pending Estate Tax Exemption Changes

The Tax Cuts and Jobs Act (TCJA) of 2017 brought a substantial increase in the lifetime federal estate and gift tax exemption, known as the Applicable Exclusion Amount (AEA). However, this windfall is on the brink of change, with the AEA set to undergo a substantial reduction at the end of 2025.  Unless Congress acts, regulations that elevated gift tax exemptions will expire at the end of 2025, and the exemption will be cut by about half, says the article “Take Advantage Of Increased Gift And Estate Tax Exclusions in 2024” from mondaq.  With the changes in tax exemptions set to expire at the end of 2025, now is the time to prepare for their impact on estate plans.

Is Your Estate Plan Ready for Sunsetting Tax Cuts in 2026?

Unless something changes, on January 1, 2026, the estate tax exemption will revert back to $5 million; adjusted for inflation, it’s expected to be approximately $7-8 million per person.  There won’t be much of an impact for Florida estates that won’t exceed the expected 2026 levels. However, the increases in home values may bring some unexpected increases to the size of many estates.

The most visible change will be the lifetime estate and gift tax exemption changes. Before 2018, the exemption was $5 million per person and $10 million for a married couple. In 2023, those limits are $12.92 and $25.85 million, respectively. In 2024, those limits will be $13.61 million for an individual and $27.22 million for a married couple.

The annual gift tax exclusion (the amount you can give away each year to someone without it constituting a taxable gift) was also increased because of the TCJA. In 2023, it is $17,000; in 2024, it will rise to $18,000. It’s not yet clear what it will be after 2025.

Current Increases in the Estate and Gift Tax Exemptions

In November 2023, the IRS announced increases for gift and estate tax exemptions in 2024, including an increase in the federal gift, estate, and GST (Generation Skipping Tax) exemption and the annual exclusion from gift tax. These changes became effective on January 1, 2024.

In his video, “Dynasty Trusts: A Tax-Efficient Way to Pass Wealth Down Through the Generations,” Jacksonville Estate Tax Attorney Bill O’Leary explains how the gift and estate tax exemption works and what the Generation Skipping Tax is.

What Are the Federal Estate and Gift Tax Exemptions for 2024?

The gift and estate tax exemption has increased to $13,610,000 per individual in 2024. Married couples can transfer up to $27,220,000 since both partners may utilize the exemption. This marks a substantial increase of $690,000 per person ($1,380,000 per married couple) from the prior year. Generally, gift and estate taxes may be due if a person’s total wealth transfer during their lifetime and at their death exceeds the gift and estate tax exemption.

The annual gift tax exclusion increased to $18,000 per donor, per gift recipient, and $36,000 per married couple if they “split” their gifts. The annual gift tax exclusion permits individuals to make gifts to any number of people tax-free every year without being counted against their lifetime gift and estate tax exemption. Jacksonville residents who may be impacted by the gift and estate tax should speak with Legacy Planning Law Group about using this historically high exemption. Many estate planning strategies such as dynasty trusts can be used to transfer wealth and take advantage of these exemptions efficiently.

What is the Generation Skipping Tax and Exemption?

The GST tax exemption increased to $13,610,000 per person in 2024. This tax may be triggered by transfers to or in trust for family members more than one generation younger than the donor. It might also be triggered by gifts to unrelated individuals who are 37.5 years younger than the donor.

What’s the Best Way to Take Advantage of the Federal Estate and Gift Tax Exemptions for 2024?

An experienced Florida estate planning attorney will explain the time-sensitive opportunities presented by the increases in 2024 in conjunction with the current (yet temporary) exemptions.  Now is the time to consider funding trusts with assets expected to have high growth potential, using a portion of the gift tax exemption while removing future appreciation from the estate.

What is a Dynasty Trust?

A dynasty trust is a long-term trust created to pass wealth across multiple generations. The primary advantage of a dynasty trust is its ability to avoid estate, gift, and generation-skipping transfer taxes over many generations.

What Benefits Do Dynasty Trusts Provide?

Reducing Tax Liability and Protecting from Creditors

Dynasty trusts keep the assets out of the taxable estates of both the grantor and the beneficiaries.  Another significant benefit of a dynasty trust is asset protection. Assets within the trust are generally shielded from the beneficiaries’ creditors, including in cases of divorce. This protection ensures that the wealth remains within the family and is used as intended by the grantor.

Significant Tax-Free Growth After Asset Transfer

When assets are transferred into a dynasty trust, they are subject to estate, gift, and GST taxes only at the time of transfer and only if they exceed the federal exemption thresholds. Once in the trust, these assets can grow and be passed down through generations without being subject to these taxes again. This feature allows for significant tax-free growth over time.

What are the Disadvantages of a Dynasty Trust?

It’s important to note that dynasty trusts are somewhat inflexible. Once established, the grantor loses access and control over the assets in the trust. This trade-off is often acceptable to those who prioritize long-term family wealth preservation. Additionally, predicting family needs far into the future can be challenging, requiring careful planning and foresight.

Working with a Florida Estate Planning Attorney is Essential

Dynasty trusts are complex legal instruments that require careful drafting to ensure they meet the specific goals and comply with tax laws. It’s crucial not to attempt creating such a trust without professional guidance.  We encourage you to book a call with our team if you would like to learn more about the sunsetting of the TCJA tax law, how it will impact your estate plan, and whether a dynasty trust may be a good option to protect your wealth.  Team Legacy offers guidance that’s tailored to your specific circumstances helping you make the best choices for your family’s future.