Tax-Free Through The Generations

Create a Tax-Free Inheritance Dynasty with Your Assets

Once, only the super rich could afford to use "dynasty trusts" to pass their wealth onto future generations. But now, that's all changed. With the right dynasty trust, folks of even moderate wealth can leave money to loved ones and preserve wealth for their grandchildren or great-grandchildren. You can even control how trust inheritance will be used, once you, as the original trust donors pass on.
For now, there's no way to predict the political fate of the U.S. federal estate tax (the current law expires in 2010). You may end up paying estate taxes on an estate worth more than $1 million, or even higher. With this much uncertainty, many high net worth people are legally avoiding these estate taxes altogether.
You can do this by placing your assets in a structure that bypasses this problem a dynasty trust. Your attorney can draft your trust vehicle so you shelter wealth from transfer taxes on larger estates once, each generation.
Dynasty trusts are growing more popular because increasing numbers of moderately wealthy U.S. individuals don't want to share their hard earned cash with the IRS. And there are plenty of "moderately wealthy individuals" out there.
Despite of recession talk, there are a record nine million U.S. households worth US$1 million or more, excluding their primary residences, according to the Spectrem Group. The latest Merrill Lynch/Capgemini World Wealth Report calculates that one in every 125 Americans today is a millionaire.
What's a Trust?
To refresh your memory, a trust is a formal legal agreement you voluntarily create and fund (making you the "grantor"). In this legal agreement, you direct another person (the trustee) to take legal title and control your donated property. The trustee takes your assets, and manages them "in trust" for the benefit of one or more persons you name (the beneficiaries).
The beneficiary receives income or distributions of the trust's assets and has an enforceable equitable title to those benefits. But the beneficiary does not control trust assets or manage the trust.
A typical "dynasty trust" can be arranged so that assets stay in the trust and can pass from generation to generation without incurring estate or generation skipping taxes, allowing wealth to accumulate.
Trusts Are Nearly Half a Millennium Old
For nearly 500 years, English and American trust law has supported a trust grantor's right to make a gift subject to whatever conditions they wish to impose. There are limited exceptions to this rule (for example, a grantor can't make a gift contingent upon a child marrying a certain person). But a grantor's right to restrict a gift is important in dynasty trusts.
Usually when you create a dynasty trust, you're providing benefits to a future generation of beneficiaries. While the trust certainly should be flexible to meet future events, it can be made contingent on a host of requirements imposed on the beneficiaries.
A trust can be set up to give you, as the grantor, access to principal, buy real estate, pay for college and reward good grades, provide health and retirement care, and stop payment to beneficiaries addicted to drugs or alcohol. The trust can also keep money away from divorcing spouses, creditors and even irresponsible beneficiaries.
It is also a way to shield money and assets at risk because it offers strong asset protection against claims and lawsuits. Consider that over 50,000 lawsuits are filed each year in the United States. More than US$175 billion is paid each year in damages and lawyers' fees related to tort lawsuits.
Until recently, trusts could effectively last only about 90 to 120 years under the common law "Rule Against Perpetuities." Since the mid 1990s, at least 20 American states (and some foreign jurisdictions) have relaxed these term limits.
Some states, notably Alaska, Delaware and South Dakota, have completely abolished the rule as to trusts of financial assets. Others have lengthened the trust terms. Wyoming and Utah now permit trusts to last a thousand years, while Florida lets them carry on for 360 years.
Extra Protection Offshore
Wealth protection and family objectives can be achieved using domestic American trusts. But you greatly enhance your protection by placing your trust in a foreign country with specialized trust laws and sympathetic courts. "Trust friendly" jurisdictions include places like Liechtenstein, Panama, Belize, Bermuda, the Isle of Man, the Channel Islands or Gibraltar.
One of the most effective asset protection devices that we recommend is the offshore asset protection trust (APT).
Because of its offshore location, it insulates against claims or creditors. It's also beyond the easy reach of U.S. or other nations' courts. The most protective offshore jurisdictions do not recognize automatically U.S. or other foreign court judgments. Foreign creditors must start all over with a lawsuit in the foreign court system. These jurisdictions also have two year statutes of limitation on bringing claims, compared to four years in most American states.
Offshore asset protection trusts are not unlike domestic U.S. trusts, in that the offshore APT is a "self settled trust" where you can transfer assets to the trust, impose restrictions and also be a beneficiary, along with others you may designate. The trustee is named by the grantor and is either a non U.S. person or a trust company with no U.S. affiliations.
One important point to keep in mind: Offshore trusts are effective only if the grantor relinquishes all control over the trust, its assets and the trustee. Otherwise, the APT may be declared to be a sham by a court or by the IRS, or both.
The trust as a legal asset protection form has been around for over a thousand years, and it's still available for you and your family.