Some of us amass enough wealth in our lifetimes to provide for not only our kids, but also our grandkids. What if you want to take this process a step further? Funding a dynasty trust with life insurance can help you create a legacy that stretches to your great-grandkids and even further down the line. A dynasty trust differs from other vehicles in that it provides for multiple generations, with an impact that reaches many years into the future. While you may never meet all of the beneficiaries of your trust, they’ll definitely appreciate your planning efforts from 20 or even 50 years prior.
What Can a Dynasty Trust Accomplish?
A properly established dynasty trust will not subject your descendants to estate taxes during the life of the trust. The only time when estate or gift taxes may become due is at the point when assets are transferred into the trust. Assuming you stay within the allowable limits, there may not be any taxes due at the time of transfer, either.
Dynasty trusts also allow the grantor to maintain control over future distribution of the funds through specific wording within the trust document. Some people poke fun at this by saying grantors are “ruling from the grave,” but this feature is actually very important. Careful language can be used to prevent family money from ending up in the wrong hands due to death, divorce, or lawsuits.
How to Fund a Dynasty Trust with Life Insurance?
A dynasty trust can be funded with ongoing annual gifts or by moving assets into the trust this year according to current estate planning rules. What does that mean? Well, in 2024, an individual can give away $13.61 million without that amount becoming subject to gift taxes. If a couple is giving money away together, that amount jumps to $27.22 million. The fact that a couple can move $27.22 million into a dynasty trust during 2024 is a significant estate planning opportunity. Consider how much that money may be worth 50 years down the road, especially if the proper financial vehicles are utilized.
Consider Funding a Dynasty Trust with Life Insurance
Rather than funding the trust with stocks and bonds, many people will choose to have the trust own a life insurance policy instead. Why? First, it avoids the annual taxation of income-producing assets within the trust. Second, the life insurance vehicle lends itself very well to long-term wealth transfer. Whether you fund the policy with annual gifts or with one lump sum transfer this year, the policy will provide a fixed, reliable death benefit, which the trust will receive upon the death of the insured(s). The grantor may also choose to buy life insurance on multiple generations, creating various points in time when tax-free income will be received by the trust.
Don’t forget that income taxes are due each year on any taxable income generated inside the trust. If too many corporate bonds or dividend paying stocks are used, that could become counterproductive to your wealth transfer goals. Using life insurance to fund the trust can help you avoid this hassle.
Pass on the Most Money Possible
If you compare the net amount of dollars passed along to your descendants through a properly established dynasty trust versus leaving them a giant pool of money that gets taxed at each generation, the potential cost savings is astronomical. The dynasty trust dramatically increases the value of each generation’s inheritance by eliminating their exposure to estate taxes. We’re talking about millions of dollars in potential savings for somebody funding their trust using the current lifetime exclusion. If you include a life insurance policy within your dynasty trust, the amount passing to your heirs may be even higher.
At Howard Kaye, we’ve seen these situations time and time again. Poor planning can ruin an estate strategy—even if just a few small details are left unchecked. Call us at 800-GET-RICH to learn how your efforts today can protect the financial interests of your family many years into the future.
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