Some states are more liberal than others when it comes to dynasty trust.  In California, a dynasty trust can exist for 90 years.  In other states – Alaska, Delaware, South Dakota, and several others – there is no time limit for dynasty trusts. 

How Does It Work?

Let’s start with the traditional, general rule.  Trusts were originally designed with a limited term of existence.  At some point, by law the trust would terminate.  This legal principle is referred to as the Rule Against Perpetuities.   Many states have a RAP while some, as mentioned above, do no.

Dynasty trusts are used to avoid taxation and preserve and grow family wealth.  Assets that are placed in trust—and the income derived from those assets – are subject to estate and gift tax only once when you transfer the assets to the dynasty trust. 

What are the Benefits?

A dynasty trust can:

• Minimize tax impacts on gifts to your family or other beneficiaries.
• Maximize the value of assets available to your children, grandchildren and future generations.
• Provide asset protection from beneficiaries’ creditors, divorcing spouses, and even from the beneficiaries own behavior, for example, irresponsible spending, drug use, or other bad habits.

The lifetime gift and estate tax exemption is currently very high (in excess of $12 million per person at the time of this writing).  The exemption is modified frequently thanks to changes in the law.  The exemption will, in fact, be cut in half after January 1, 2026.  A dynasty trust is a great vehicle to protect your family from the vagaries of the current political party in power.    

Why Use a Dynasty Trust?

Dynasty trusts are a great option for a family that wishes to:

• Preserve its wealth for future generations.
• Avoid unnecessary taxation.
• Maximize gift growth through compound interest. 

Where Can I Learn More?

Drafting and funding a dynasty trust is complex and requires the assistance of a California estate planning attorney.  To get more information about dynasty trusts, call the Law Office of Jonathan Alexander at (949) 334-7823.  Mr. Alexander has nearly 20 years of legal experience and can help you create an estate plan that protects you, your family, and the generations to come. 

To learn more about Mr. Alexander, his firm, and his estate planning philosophy click here.    

How Does a CLT Work?

1. The grantor contributes assets to an irrevocable trust establishing the CLT and selects the term (fixed period or for duration of the life of one or more people).    The grantor may, depending on the type of CLT selected, be eligible to take a partial tax deduction.  The tax deduction calculation considers the trust’s term, the projected lead payments, and the IRS interest rate used to assume a specific rate of trust asset growth. 
2. Payments are made from the CLT to the selected charity or charities.  Charitable remainder trusts have more limited terms than CLTs. A charitable remainder trust’s term, if you choose the limited term option instead of using a beneficiary’s lifetime, is limited to 20 years.  CLTs that use a fixed term are not subject to this 20-year limitation.  The amount the CLT must pay the charitable entity is also flexible as there is no minimum or maximum payment amount, as long as, payments are made each year.
3. When the term expires, the remaining assets are distributed to the non-charitable beneficiaries (typically children, grandchildren or trusts arranged for their benefit). 

What are the Two Types of CLT?  

1. A CLT with a unitrust payment, which is referred to as a charitable lead unitrust or a CLUT.  The charity receives a fixed percentage of the net fair market value of the CLUT’s assets that are revalued each year. 
2. A CLT with an annuity payment, which is referred to as charitable annuity lead trust or CLAT.  Here the charity will receive an annuity payment that is either
   1. A fixed amount; or
   1. A fixed percentage of the initial fair market value of the property that is initially transferred into the trust based on the Internal Revenue Code Section 7520 rate that exists in the month that the trust is created. 

What’s the Difference Between a Grantor and Non-Grantor Charitable Lead Trust?

A grantor charitable lead trust allows the grantor to take an immediate income tax charitable deduction for the present value of the future payments that will eventually be made to the charity.  There are, of course, deduction limitation that apply depending on whether the beneficiary is a public charitable entity or a private foundation. With a grantor CLT, the trust’s income is taxable to the grantor during the term.

With a non-grantor charitable lead trust, the trust itself—not the grantor—is the owner of the trust assets.  The grantor cannot take an income tax deduction for the amounts paid to the charitable entity. The trust itself pays tax on undistributed net income and is allowed to claim an unlimited income tax charitable deduction for payments to a charitable beneficiary.

Where can I get more Information?

Setting up a charitable lead trust requires the assistance of a qualified estate planning attorney. Call the Law Office of Jonathan Alexander at (949) 334-7823 to learn whether a CLT is the correct option for you and your estate plan.  Mr. Alexander has 20 years of legal experience and can help you create an estate plan that protects you, your family and your legacy. 

To learn more about Mr. Alexander, his firm, and his estate planning philosophy click here.

The Grantor and non-charitable beneficiaries who receive income before the remainder passes to charitable beneficiaries are referred to as “Lead Beneficiaries.”   

A CRT is referred to as a “split-interest” trust because it allows the Grantor to donate to charity and save on taxes while gifting money to other beneficiaries.  The Grantor receives a partial tax deduction based on the remaining trust assets received by the charitable beneficiaries.    

How Long is the Period of Time that the Grantor and/or Beneficiaries Receive an Income Stream?

A Grantor can arrange for himself and/or other beneficiaries to receive a potential income stream from the CRT for a period of time not to exceed 20 years or the life of one or more non-charitable beneficiaries. The remaining assets then pass to the named charitable beneficiaries.   

There is also an actuarial value component.  The remainder that passes to the charitable beneficiaries must be at least 10% of the initial CRT value established at the time of funding.  The 10% test creates a minimum amount or floor that must remain in trust for the benefit of the charitable beneficiary. 

If the Lead Beneficiary very young, the CRT may fail the 10% test.  The 10% test depends on three elements:

1. The term of the CRT or for lifetime CRTs, the life expectancy of the Lead Beneficiary.
2. The amount of the annual payment.
3. The Internal Revenue Code 7520 rate that is defined as 120% of the federal midterm interest rate (which in November 2022 is 4.80%). 

In a high interest rate environment, a CRT strategy becomes more favorable because higher rates can reduce the actuarial value of the taxable gift. If the trust does not meet these requirements, it can be reformed to meet legal requirements.

What are the Two Types of CRTs?

There are two types of CRTs.

1. A Charitable Remainder Annuity Trust (“CRAT”) is a type of CRT where a fixed annuity payment is distributed annually and no additional contributions to the trust are allowed.
2. A Charitable Remainder Unitrust (“CRUT”) is a type of CRT that distributes a fixed percentage of the assets to the beneficiaries based on the trust balance, which is updated or “revalued” each year.  With a CRUT, the Grantor can make additional contributions. 

For both the CRAT and the CRUT:

• The Grantor contributes an irrevocable transfer of money or property. 
• The Grantor and/or his named non-charitable beneficiaries then receive a portion of the income.
• The amount of the trust assets that must be distributed whether as fixed payment (CRAT) or fixed percentage (CRUT), must be not less than five percent of the value of the trust assets and must not exceed 50 percent of the value.
• The payments must be made at least annually (more frequently is allowed).
• When the CRT expires, the remaining assets pass to charitable beneficiaries.

How Does a CRT Work?

A Grantor transfers a highly appreciated asset to a CRT.  When the CRT sells the asset, the CRT is not subject to capital gains tax, which preserves the full value of the asset within the trust.  The proceeds of the highly appreciated asset sale may then be invested in a diversified portfolio.  The capital gains taxes are eventually paid but are spread out and payable when the Lead Beneficiaries receive income from the CRT.  As mentioned above, the Grantor also receives an immediate tax deduction.     

Where Can I Get More Information?

To create a charitable remainder trust, you should consult with a qualified California estate planning attorney.  Call the Law Office of Jonathan Alexander at (949) 334-7823 to set up your CRT today. 

To learn more about Mr. Alexander, his practice, and his estate planning philosophy click on the link to his bio here. 

How Does It Work?

In a nutshell, here’s how a SLAT operates.  

1. The grantor spouse transfers ownership of his separate property into the trust and reports the gift on a gift tax return.  SLATs may only be funded with separate property. Because California is a community property state it is wise to draft a partition agreement to ensure that the property being transferred into the SLAT is indeed separate property. 
2. Once the property is transferred to the trust (referred to as “funding” the trust), the beneficiary spouse may request distributions of income or principal from the SLAT that may also indirectly benefit the grantor spouse. 
3. When the SLAT is terminated (typically when the beneficiary spouse dies) the assets that are still in the trust pass to the remainder beneficiaries as described in the trust (usually children and or grandchildren).

What Kind of Assets can be funded/transferred into a SLAT?

A SLAT may be funded with several different types of assets if they are the Grantor’s separate property.  It makes sense to transfer assets that will go up to in value.  If you were to transfer a depreciating asset into the trust, you would waste part of your individual lifetime gift and estate tax exemption.  If you transfer $2 million of Apple stock to your SLAT and it goes up in value to $20 million, you will have only used $2 million of your exemption and the $18 million dollars of increased value is outside of your taxable estate.

What are the Risks?

To truly maximize the benefits afforded by SLATs, a couple would each create a SLAT for the benefit of the other.  The IRS; however, may interpret two trusts as constructively related under the Reciprocal Trust Doctrine.  Applying this doctrine, the IRS may conclude that because two SLATs are reciprocal and disregard them by including the SLAT assets in the grantor’s estate (destroying the entire purpose of the SLAT).

To avoid the reciprocal trust doctrine, consult with a qualified attorney.  Your attorney will likely counsel you to, among other things, create the trusts and transfer assets to them at different times, use different trust language, and provide beneficiaries alternative rights of withdrawal.

Where Can I Get More Information?    

Drafting a spousal lifetime access trust is a complicated endeavor and will require the assistance of a qualified California estate planning attorney.  For more information about how to properly create a SLAT that maximizes your individual lifetime gift and estate tax exemption call the Law Office of Jonathan Alexander at (949) 334-7823. 

To learn more about Mr. Alexander, his practice, and his estate planning philosophy please visit his bio linked here. 

How Does it Work?

When the Grantor or Grantors (e.g., a husband and wife) create their estate plan they elect to use a QTIP at the death of the first spouse.  The Grantors decide the rules for the QTIP. There are some design limitations. The QTIP must provide that the surviving spouse receives all the income from the QTIP during her life. If it does, the QTIP trust will qualify for the marital deduction and no estate tax is due.  Under federal law, spouses can transfer an unlimited amount of property and/or money to each other at any time free from taxation. This is known as the unlimited marital deduction.  Only the beneficiary spouse can be a beneficiary of the QTIP trust

The QTIP can also be structured to provide the surviving spouse access to principal.  Once the surviving spouse dies, the payments from the QTIP stop and the assets are then distributed to the Grantors’ beneficiaries as explained in their estate plan. 

What are the Similarities and Differences between a QTIP and Marital Trust?

A marital trust is like a QTIP in that they are both:

• Irrevocable trusts.
• They only name the spouse as beneficiary.
• They can qualify for the unlimited marital deduction.
• Defer taxes until surviving spouse’s death.  

The QTIP is different from the marital trust in that:

• The QTIP does not provide control to the surviving spouse (the Marital Trust does).
• The QTIP provides access to income and may provide access to principal (in a Marital Trust the surviving spouse controls how assets are distributed).

When Would I Need One?

If you are concerned about how your assets are distributed after your spouse dies, you may want to consider a QTIP.  This especially relevant with blended families. 

What are the Drawbacks?

A QTIP may create conflicts between remainder beneficiaries (typically, the Grantors’ children) and the surviving spouse.  The crux of the conflict is that the surviving spouse has no control over the remaining assets.  The chance that conflict will arise hinges on:

• The status of the relationship between the surviving spouse and the remainder beneficiaries (this relationship may be especially fractured if these are children from a prior marriage).
• The surviving spouse’s sources of money besides the QTIP.

What are the Benefits?

With a QTIP, you control the flow of assets after your death and even after your spouse’s death.  Regardless of what your spouse does, any assets that remain in the QTIP are passed to your beneficiaries (children, grandchildren, or kids from a prior marriage). 

QTIPs can provide asset protection.  If place controls around how your money and property are to be used, you can prevent scammers and thieves from getting access.

How Do I get More Information?

 Call the Law Office of Jonathan Alexander at (949) 334-7823 to find out whether a QTIP trust is right for you.  Mr. Alexander has 20 years of legal experience and is ready to help you create a customized, comprehensive estate plan that protects you, your family, and your legacy. 

To read more about Mr. Alexander, his practice, and his estate planning philosophy visit his bio linked here.