The Tax Cuts and Jobs Act (TCJA), signed into law this past December, affects more than just income taxes. It’s brought great changes to estate planning and, in doing so, bolstered the potential value of dynasty trusts.

Exemption Changes

Let’s start with the TCJA. It doesn’t repeal the estate tax, as had been discussed before its passage. The tax was retained in the final version of the law. For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the generation-skipping transfer tax exemption amounts have been increased to an inflation-adjusted $10 million, or $20 million for married couples (expected to be $11.2 million and $22.4 million, respectively, for 2018).

Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

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Many non-US persons have children, grandchildren and succeeding generations who are US citizen or resident individuals. The foreign person often wishes to create a trust for, or implement some other form of estate plan that will benefit these US individuals, whether during the lifetime of the foreign person or upon his or her death. When US individuals are to be the beneficiaries of such planning, extreme care must be taken so as not to run afoul of the numerous US tax rules that can result in harsh taxation to the US beneficiary who receives distributions from a foreign (non-US or “non-domestic”) trust. The creation of a so-called “Dynasty Trust” may be of benefit in some cases and can assist in the saving of significant US tax dollars.

What is a Dynasty Trust? How Does it Work?

In the past, many US States had laws in place that prevented a trust from continuing its existence through multiple levels of generations. This law was known as the “Rule Against Perpetuities.” This Rule was designed to prevent rich families from tying up family assets in trusts that continued through many generations of heirs. The Rule Against Perpetuities has been changed in many States, and as a result, the so-called “Dynasty Trust” appeared. Read More