A Florida dynasty trust is a long-term trust designed to preserve and pass an individual’s wealth from generation to generation while avoiding transfer taxes. As long as the assets remain titled to the trust, they are not subject to the hefty tax burden applied to larger estates.
In this article, you will have a full overview of the pros and cons associated with Florida dynasty trusts.
Understanding Florida Dynasty Trusts – The Fundamentals
The key element of a dynasty trust is its duration. In most cases, the trustor of a dynasty trust designates his or her children as beneficiaries. Once the last beneficiary is dead, the trustor’s grandchildren or even great-grandchildren generally inherit the property held in trust as beneficiaries.
Considering this type of trust is a multi-generation arrangement, the trustee appointed by the trustor is usually a financial entity, such as a bank or a trust company. As dynasty trusts are irrevocable, it is impossible to change, amend, or revoke the trust without court intervention if the trust is properly executed.
Advantages and Disadvantages of Florida Dynasty Trusts – Taking a Closer Look
Dynasty trusts are the ideal solution for individuals who own larger estates and want to save their assets from estate taxes.
It is fundamental to remember that assets held in a trust are subject to federal gift or estate tax exclusively when the trustor transfers them to the dynasty trust. While multiple generations benefit from the assets held in the trust, they are no longer subject to ongoing estate taxes.
Considering the value of properties and assets may accrue over time, the taxable value of a property may increase while it is held in the trust. Hence, it is possible to reduce taxable estate while preserving the value of the trust’s assets.
If someone owns a wealthy estate, it is subject to estate taxes. Once the estate’s owner dies, the heirs are subject to taxes during the distribution of the decedent’s assets. If the value of an estate exceeds $12.06 million, it is subject to federal estate or generation-skipping transfer tax.
Creating and funding a Florida dynasty trust is a valuable solution to reduce the taxable estate and use the income generated by trust assets in profitable investments – instead of taxes.
Please note that income generated by assets held in a dynasty trust is subject to income taxes. The best approach is to work with a Florida estate planning attorney to fund dynasty trusts with non-income-producing assets.
Dynasty trusts are also used strategically to hold life insurance policies on behalf of the trustor’s beneficiaries. Once the trustor is dead, life insurance policies held in the trust can be used to pay estate taxes owed on other assets in the decedent’s estate.
The disadvantage of dynasty trusts is the descendants’ lack of control and flexibility. The trustor is responsible for designating the beneficiaries, their rights, and how they should inherit the assets held in the trust.
Once the trustor and the original trust beneficiaries have passed away, only the trust instrument provides the terms by which the trust must be managed. If the language used in the document is vague or deficient, it may result in management issues for future generations – especially if the trustee is a bank or a trust company.