Under the federal transfer taxation system, the value of assets are taxed every time they pass from one generation to the next. Inadequate estate planning can result in taxes that significantly erode the value of an estate.
There are three main kinds of transfer taxes: Gift, estate, and generation skipping (GST). These transfer taxes are assessed on transfers made while the gift giver is still alive or upon that person’s death.
- Gift tax is assessed on transfers made while the gift giver is still alive.
- Estate tax is assessed on transfers that occur upon the death of the gift giver.
- Generation skipping transfer tax is imposed, generally speaking, on transfers made to a person who is two or more generations below that of the gift giver. The transfers may occur while the gift giver is still alive or upon that person’s death.
The current version of GST tax imposes a tax at the highest marginal estate tax rate on certain generation skipping transfers. The current individual exemption from GST tax is $5,340,000 (adjusted annually for inflation), and the current highest marginal estate tax rate is 40%. Proper estate planning involves leveraging the GST tax exemption for gift givers with estates that would otherwise be subject to the GST tax.
How Can I Limit My GST Tax?
- Create a Wyoming Dynasty Trust for the benefit of future generations. All or a portion of a settlor’s GST exemption can be allocated to assets transferred to the trust. Note that a settlor’s spouse may also participate in funding a dynasty trust, resulting in a doubling of the amount exempted from GST tax.
- In many states, trust law requires that a trust terminate at some specified future date, typically 21 years after the last to die of certain identified beneficiaries. This is commonly referred to as the “rule against perpetuities.” A Wyoming Dynasty Trust, however, can last up to 1,000 years, with the result being that the growth of the assets in a properly structured trust can be shielded from gift, estate, and GST tax for up to 1,000 years.
- Accordingly, a trust established in Wyoming and meeting certain other requirements could remain active for 1,000 years. As long as the trust remains in place, the assets of the trust avoid federal transfer tax. The longer the Dynasty Trust lasts, the more generations of federal taxation it escapes, resulting in tremendous growth potential for the Wyoming Dynasty Trust assets.
Why a Wyoming Dynasty Trust?
- The lack of state income tax in Wyoming fosters additional principal accumulation within a Dynasty Trust and thus creates significantly more wealth for future generations.
- Wyoming trust law provides considerable protection to trust assets from the claims of a beneficiary’s creditors. Wyoming’s “spendthrift” laws shield a trust’s assets in the event of the beneficiary’s financial difficulties.
- Wyoming law provides a number of avenues by which a Dynasty Trust’s terms can be changed, thereby allowing considerable flexibility with respect to the evolving needs of a family.
For more information on how Jackson Hole Trust Company can assist with the protection of your assets,
please contact us at 307.739.2500.