Dynasty Trusts for Lasting Wealth Protection

Irrevocable Trusts:

• General Characteristics: Once established, irrevocable trusts cannot be modified or terminated without the beneficiaries' consent. The grantor (the person who creates the trust) effectively removes their rights of ownership to the assets and the trust itself becomes the legal owner.
• Tax Implications: Assets transferred to an irrevocable trust are removed from the grantor's taxable estate, which can reduce estate taxes upon the grantor's death. However, the trust may be subject to its own set of tax rules, and distributions from the trust can have tax implications for the beneficiaries.

ILIT (Irrevocable Life Insurance Trust):

• Specific Use: An ILIT is a type of irrevocable trust specifically designed to exclude life insurance proceeds from the insured's estate for estate tax purposes. The ILIT owns the insurance policy, pays the premiums, and the death benefit is paid to the trust upon the insured's death.
• No Step-Up in Basis: Since the asset in question is a life insurance policy, the concept of a step-up in basis doesn't apply. The proceeds are paid out tax-free upon the death of the insured, assuming the ILIT is properly structured and administered.

Dynasty Trust:

A Dynasty Trust is a long-term estate planning tool designed to protect and grow your wealth across several generations. By placing assets in a Dynasty Trust, they're shielded from estate taxes at each generational transfer, providing sustained financial support to your heirs. This trust allows for specific guidelines on how and when assets are distributed, offering a blend of growth, protection, and flexibility for your family's future.

• Designed for Generational Wealth: Dynasty trusts are structured to last for multiple generations, potentially indefinitely, to preserve wealth within a family and protect assets from estate taxes, creditors, and divorcing spouses over many generations.
• Lack of Step-Up in Basis: Unlike assets passed directly to heirs at death, which may receive a step-up in basis, assets held within a dynasty trust do not receive a step-up in basis with each generational transfer. The trust owns the assets, and ownership does not change with the death of a beneficiary.
• Incorporation of ILIT: A dynasty trust can indeed incorporate life insurance policies within its structure, using an ILIT mechanism to provide liquidity, fund future trust expenses, or enhance the trust's assets for future generations.

Key Differences:

• Purpose and Flexibility: The primary difference lies in the specific purposes and the flexibility offered by each type of trust. An ILIT is focused on life insurance and estate tax exclusion for those proceeds, while a dynasty trust is broader, aiming to preserve wealth across multiple generations with various assets.
• Tax Implications and Benefits: Both types of trusts offer estate tax benefits, but they operate differently. ILITs focus on excluding life insurance proceeds from the taxable estate, whereas dynasty trusts aim to protect a wide range of assets from estate taxes over generations.
• Generational Impact: Dynasty trusts are explicitly designed to benefit multiple generations and can include various mechanisms, such as ILITs, within their structure to achieve long-term financial goals.

Each type of trust serves distinct purposes in estate planning, and the choice between them—or the decision to use them in conjunction—depends on individual goals, family circumstances, and the types of assets involved. Consulting with estate planning professionals is crucial to tailor these tools to your specific situation.