VERY SIMPLE CONCEPT
This blog examined the dynasty trust in the past but it is time to reexamine certain aspects of the dynasty trust. The dynasty trust is a trust designed primarily to avoid the generation skipping transfer tax when a person wants to leave money to their grandchildren or great grandchildren (or even generations beyond that). Before getting into the nuts and bolts of what a dynasty trust is, it is best to outline some of the basic tax issues inherent in the generation skipping transfer tax.
Grandfather wants to leave an asset to his son, with the intention that he will leave it to his son and for him to leave it to his son and so on. Just to make the dollar figures simple, let us assume that it worth $10 million. For further simplicity, let us also assume that grandfather’s estate already went through the federal (and state) estate tax exemption. That means that son has to pay the current top estate tax rate of 40%, which means that the asset is no longer worth $10 million. Instead it is only worth $6 million. For further simplicity, father’s estate also passed through all of his estate tax exemption, so instead of the asset being worth $6 million when it passes to the grandson, it is now worth $3.6 million in light of the 40% estate tax. And the process goes on and on.