Use of a dynasty trust in estate planning.

• Author: Montague, Larry

High net worth individuals should consider a dynasty trust for significant estate tax savings over many generations.

Every U.S. citizen has the ability to transfer, either during life or at death, $600,000 ($1.2 million if the individual's spouse joins in the gift) without incurring any U.S. estate or gift tax. If an individual will not need the funds, it may be very advantageous to transfer the funds as soon as possible for several reasons.

* All income and appreciation from the transferred assets are removed from the transferor's estate.

* The marginal Federal estate and gift tax rate can be as high as 60%.

* The benefits of the $600,000 exemption are phased out in large estates (i.e., those over $10 million).

* Congress has periodically discussed lowering the exemption amount.

* If an individual transfers assets to a child, the assets - including income from and appreciation on such assets - may be subject to the same high Federal estate taxes at the child's death.

* Although a transfer to children will defer the estate tax liability, it is frequently even more advantageous to "skip" the children and transfer assets directly to grandchildren.

* Every U.S. citizen can transfer up to $1 million to a grandchild (referred to as a "skip" person) without incurring a U.S. generation-skipping transfer tax. Transfers to a "skip" person in excess of $1 million are taxed at a flat rate of 55%.

Planning strategy: Individuals can transfer up to $600,000 ($1.2 million joint) to a dynasty trust and provide that the trust will remain in existence as long as the applicable law allows. (Frequently, such trusts will remain in existence for...