A dynasty trust, also known as a GST, legacy or perpetual trust, is a flexible vehicle that can provide asset protection, wealth management and wealth accumulation for many generations, or even perpetually. In making contributions to a dynasty trust, an individual’s (or married couple’s) exemptions for gift taxes and generation-skipping taxes are utilized to insulate trust assets and distributions against gift and estate taxes forever — a good way to protect family businesses and hard-earned family wealth against punitive taxes, divorce and frivolous lawsuits.
When trust assets are invested in a life insurance policy, no income or capital gains taxes are paid on investment growth, and insurance proceeds pass income-tax free to the trust. Accordingly, trust assets in the life insurance wrapper can grow and be distributed to beneficiaries completely free of taxes perpetually. Private placement life insurance (PPLI) generally provides better investment returns than conventional life insurance and is protected in segregated accounts separate from the general fund of the insurance company. Foreign-based PPLI has advantages over domestic PPLI. It has lower minimum premium commitments (min. premium commitment usu. $1 million), and has lower start-up fees and carrying costs. In contrast to foreign PPLI, less-desirable domestic PPLI requires a minimum premium commitment of $5 million or more, only in cash, has higher fees, and is subject to state-imposed investment restrictions.
An alternative to PPLI is a foreign deferred variable annuity (DVA), which may be obtained for a minimum premium commitment of $250,000.
Currently, the individual federal lifetime gift and estate tax exemption is $5+ million. Although the U.S. Congress could lower the exemption amounts in the future, if a dynasty trust is already established, it will (presumably) be protected against prospective changes in the tax laws.
Dynasty trusts also protect family wealth against estate or inheritance taxes imposed by some states. For example, New York’s estate tax is 10-16 percent of estate values exceeding $1 million, which is common. Yet, New York and all other states (except Connecticut) have no gift taxes. Thus, “gifting” of assets to a dynasty trust protects them from both federal and state estate (or inheritance) taxes, as well as providing asset protection against possible creditors of trust beneficiaries.
In a self-settled, discretionary asset-protection dynasty trust, the grantor can also be a trust beneficiary.
For more detailed information about US tax-law compliant dynasty trusts, please consult the articles listed on this website page, or contact this office for a free consultation.
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Summary: An irrevocable life insurance trust (ILIT) comprises two main parts: (1) an irrevocable asset protection trust; and (2) a life insurance policy owned by the trust. An international ILIT is better than a domestic ILIT because it is more flexible and less expensive. Private placement life insurance (PPLI) serves as a “wrapper” around a global, variable investment portfolio that grows free of income and capital gains taxes. At the trustee’s discretion, the trust may access policy cash value by withdrawals and tax-free loans during the life of the insured. The trust settler (grantor) may also be a beneficiary. Upon death of the insured, PPLI proceeds are paid into the ILIT free of income and estate taxes.
Summary: An offshore tax-free asset-protection life-insurance dynasty trust is useful not only for the wealthy. In full compliance with U.S. tax laws, an individual or a couple having a net worth of about $1 million to $5 million can fund an offshore asset-protection life-insurance dynasty trust that provides a life insurance benefit, tax-free growth of a variable high-yield investment portfolio, tax-free policy loans during the life of the insured, tax-free payment of policy proceeds to the trust upon death of the insured and tax-free distributions to beneficiaries.