As people are preparing their estate plans, it is often the case they want to leave wealth to their loved ones.  In some fortunate cases, the person has adequate resources in their estate to set up a trust which will benefit their family for generations to come.  For people seeking to keep their assets in their family and minimize estate taxes for their beneficiaries, a legacy trust can be a great estate planning tool.

A legacy or dynasty trust is an irrevocable trust which permits the person creating the trust to designate certain assets to be used by future generations of their family. This trust can be funded during the life or death of the grantor.  A legacy trust has features which allow the creator to have a great deal of control over who gets the trust and how it must be used.

To become effective, the “grantor” (the person creating the trust) must first determine what purpose he or she is trying to satisfy.   The specific purpose of the trust can help to ensure that its goals are met.  For instance, a legacy trust can be for a specified purpose such as higher education, the upkeep expenses of a family business, health care, or to provide for the care and maintenance of a beneficiary after reaching a set age. The legacy trust can be limited to passing only to family members.

The beneficiaries may not be direct recipients of the trust funds but are allowed to use the funds for the specific purpose stated in the trust (for example, a trust for a grandchild may allow checks to be written directly to a college for tuition).  Due to the fact that the beneficiaries do not own the trust, it cannot be seized as an asset by creditors, nor is it subject to a beneficiary’s divorce proceedings or own poor spending habits.  This serves to protect the assets going forward.

One of the concerns when passing on wealth the family is that it will be heavily taxed.  One of the most significant benefits of a legacy trust is that it will not be subject to estate taxation after it is initially transferred.  This is sometimes referred to as a generation-skipping tax.  Meaning that as the trust assets pass to the next generations, they will not be subject to same estate taxes as the first generation of beneficiaries.  Also, if there is an increase in the value of the trust assets, that growth also will not subject to the estate tax when the beneficiary dies.

In many states, trusts only last for a certain number of years. For instance, in Michigan, it used to be that the life of a trust was limited under what was called the “rule against perpetuities” to about 90 years.  However, in 2008, Michigan changed its rules and created a way for legacy trust to exist in a manner which allowed the trust assets to remain in the family forever while protecting the assets and minimizing taxation.

A legacy trust can be a valuable tool for those seeking to ensure their assets remain for the benefit of their family while not being subjected to repeated estate taxation.  Further, this kind of trust will provide the trust creator with the peace of mind of knowing that their assets will serve generations of their family in the ways they intended.

We understand the importance of planning or the future of your family and estate and can help you create a trust which will honor your wishes while providing for generations to come. Please contact us if we may be of assistance.

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