Copyright 1996, Marc S. Weissman
Certified Specialist: Estate Planning, Trust and Probate Law
Certified by the California Board of Legal Specialization of The State Bar of California
Weiss & Weissman, San Francisco, California
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DYNASTY TRUST: AN HEIR'S VIEW

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

Asset protection involves placing your assets beyond the reach of creditors, in a way that you still have use and control of the assets.

It is difficult to protect your assets from your creditors' claims. However, protecting gifts or inheritances you leave to children or other heirs is very easy, and is something which should be considered for anyone who may inherit a substantial amount. "Substantial" is a relative term; an inheritance should be protected for anyone inheriting anything more than $100,000.

What's better than inheriting a fortune (even a small one)? Investing it and spending it, any way you want to, without owning it! This is the concept behind the Dynasty / Perpetual Trust, a variation we can easily build into a Living Trust for the benefit of a client's heirs.

If you inherit something, you own it.

  1. If you are ever sued (for anything, such as a business problem, car accident, or personal injury), what you own is at risk;
  2. If you are divorced, what you own is at risk;
  3. You pay income taxes on the annual profits generated, by assets you own;
  4. At your death, your assets are subject to death taxes.

On the other hand, if your inheritance comes to you in a Dynasty Trust, you don't own it, even if you are authorized to: invest freely; and spend it to the extent you deem appropriate for the health, education, and support of yourself and your family.

If you are ever sued, it cannot be seized, because you don't own it. [If you are hit with a billion dollar judgment, they cannot touch the Trust, but they can get a "charging order" allowing interception of any payments coming out to you or for you. Then you must stop taking money out for yourself, but may take money out for other family members you select.]

If you are ever divorced, your spouse won't be able to get any part of it, because you don't own it. [Alimony and child support may be affected, but not the property division.]

When you die, it is not taxed, because you don't own it. This is true even if you have the right to determine which members of your family get whatever you have not spent, at your death. [Actually, only $1,000,000 per person is free of future tax when it passes to the next generation; tax may be imposed on any excess.]

While you are alive, income taxes are owed on annual profits by whomever gets the money. This gives you flexibility to split that tax liability among whichever members of your family are in the lowest tax brackets.

The only detriment to this plan is that after you get your inheritance in Trust (when whomever established the Trust dies) a special income tax return [IRS Form 1041] is required every year, but the tax liability normally is the same or less than it would be with an outright inheritance.

Unfortunately, we cannot provide these benefits for our own property, but we can build these benefits into inheritances we leave to others, or request that our parents consider such provisions for us.

See an article about the benefits of a Dynasty Trust: Parent's View.

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