What are Dynasty Trusts

Dear Len & Rosie,

I am helping my 85-year-old mother ensure that her estate plan is in order, and I am also planning for myself. I am very interested in the dynasty trust, but am confused about a few aspects. What are they all about?

Norman

Dear Norman,

One of the questions about estate planning is what happens to the inheritance you pass on to your children. Will they spend it? Will they lose it in a lawsuit? Will they give it to their spouse instead of leaving it to your grandchildren? Do you want your ex-son-in-law driving a Lexus bought with what used to be your money?

Dynasty trusts are designed to protect the inheritance you leave to your children from creditors, spouses, and future estate taxes. Your mother can update her estate plan to leave you an inheritance in a dynasty trust instead of giving it to you out right. There are several advantages to this.

First, since it’s in a trust, your inheritance isn’t really your property, even if you are the trustee. That means your inheritance will benefit from creditor protection. While we cannot guarantee that you would never lose your inheritance in a lawsuit, a properly drafted and managed dynasty trust should protect you if you ever get sued.

Second, since your inheritance is held in a completely separate trust, segregated from your other assets, it’s easier to protect its status as your separate property than if you held everything directly in your name. Since you don’t really own your dynasty trust, neither will your spouse, even if you get divorced.

Third, and perhaps most importantly, a dynasty trust creates a dynasty. The amount of your inheritance that is exempt from Generation Skipping Transfer Tax may be held within the dynasty trust for generation after generation with no additional estate tax due on your death, or the deaths of your descendants. The duration of the dynasty trust is limited only by a law called the Uniform Statute Rule Against Perpetuities, which requires a final outright distribution of the trust within 90 years of your mother’s death. And it’s even possible to create a dynasty trust in certain states (not California) that may last forever. The point here is that if you invest your inheritance instead of spend it, then it can continue to grow for generations while continuing to avoid federal estate tax at each generation.

If your mother creates a dynasty trust for your inheritance, she will be able to decide what, if any, rights you have to decide who gets to inherit the trust upon your death. Maybe she’ll let you cut your wife in for a share. Or maybe not. She could even create a dynasty trust for your benefit with someone else as trustee if you’re not so good with money. With a dynasty trust, your mother can provide for her descendants for generations to come.


Len & Rosie

What happens when a parent fails to ensure that their estate plan carries out their wishes?

Dear Len & Rosie,

My 78 year old father died last year in Connecticut. His wife, my stepmother, inherited everything under his will, even though Father always said that my brothers and I would get his money when he died. Of course, she is also the executrix of his estate. My father was married to her for over twenty years and cared for her at home until the day he died. When we buried him, her family praised him at the funeral for taking care of her for so long.

The problem is that she has Alzheimer’s Disease and now lives in a rest home. She is entirely incompetent, and could not even recognize my father in the last year of his life. Her son served as my father’s executor, because of her disability. She is actually very wealthy, and does not need the money given to her by my father. She owns two houses, a vacation home, and a six figure brokerage account. I have seen her will, and she gives nothing to me or my brothers. Our inheritance has been thrown away to a woman who can’t use it and doesn’t even know she has it. Is there anyway to fight this?

Kathy

Dear Kathy,

Under normal circumstances, there are two ways for you could get a portion of your fathers’s estate. First, you could simply ask your stepmother to give you the money. Since she can no longer make competent decisions for herself, she cannot give away her inheritance. Her son is probably managing her estate, either as an agent appointed by a power of attorney or as a conservator appointed by the court. In either event, the person managing her finances cannot just give you the money without breaching his fiduciary duty to your step-mother. His job is to protect your step-mother’s estate. Clearly, you are not going to get any money that way.

Your second alternative is to challenge your father’s will in court. The deadline for filing a will contest in Connecticut, where your father lived, is normally thirty days after the probate court accepts a will as the actual last will and testament of the decedent. If your father’s executor was on the ball, probate of your father’s estate is well underway and that deadline has passed, but since we do not practice law in Connecticut, you may want to discuss this with an attorney over there.

Even if you could still file a will contest, you would have to discredit your father’s will by proving that he did not have the capacity to make a will or was subject to undue influence when he signed it. This is a longshot at best. Your description of your father providing care to his wife doesn’t lend itself to a conclusion that he didn’t know what he was doing. And even if you do get the court to throw out your father’s will, your step-mother will still inherit much of your father’s estate through intestate succession and spousal election.

Your problems exist because your father failed to ensure that his estate plan carried out his wishes. Maybe it was his lawyer’s fault. Maybe your father assumed that his wife would die first and you would inherit his estate. We are sorry that we do not have a solution for you. This as a cautionary tale. In any blended family with children from prior marriages, leaving everything outright to a surviving spouse isn’t such a good idea. Your father could have left his estate in a trust for his wife’s benefit that would pay out to his own children upon her death. He did not do so, and that may result in you inheriting nothing at all.

Len & Rosie