Steven J. Oshins, Esq. is a nationally renowned estate planning and asset protection attorney based in Las Vegas, Nevada, with clients all over the United States. Steve was the author of Nevada’s 365-year Dynasty Trust law and often works jointly with estate planning attorneys from other states on setting up dynasty trusts and other advanced level estate planning and asset protection techniques.
We recently had the opportunity to interview Steve on the topic of Dynasty Trusts.
UEP: Would you please start by describing how the Dynasty Trust works?
Steve Oshins: Let me begin by clarifying that I’m talking about the Dynasty Trust in the context of a lifetime irrevocable trust. This is very similar to the Personal Asset TrustSM that your law firm drafts inside the Living Trust, except the Dynasty Trust is irrevocable and funded during life rather than revocable and funded after death.
A Dynasty Trust leverages a person’s gift and generation-skipping transfer tax exemptions for as many generations as applicable state law permits. Whereas most attorneys draft trusts to provide for mandatory distributions to the grantor’s children at staggered ages, a Dynasty Trust is drafted to encourage the trustees of the trust to keep the assets in trust for the benefit of the beneficiaries and to allow the beneficiaries to use the trust property rather than receive it outright where it will be subject to estate taxes, creditors and divorcing spouses.
A true Dynasty Trust is one which is set up under the laws of a state that has modified its rule against perpetuities to allow the trust to continue perpetually or, such as Nevada, that has modified its perpetuities laws to provide for a much longer term than that permitted in the majority of jurisdictions.
If the client does not reside in one of these favorable Dynasty Trust jurisdictions yet is not satisfied with the traditional perpetuities term in that client’s home state, then the client can utilize another state’s law by using a co-trustee in that more favorable state. The co-trustee can be an individual, a trust company or a bank. In order to provide for continuity, it is preferable to use a trust company or bank.
UEP: Now that you have described the Dynasty Trust concept, how do you use the Dynasty Trust as an irrevocable life insurance trust?
Steve Oshins: In my practice, I use a Dynasty Life Insurance Trust in nearly every instance in which most attorneys would use a traditional irrevocable life insurance trust. Essentially, if the amount of life insurance death benefit is sufficient to cause an estate tax and thus should be purchased by an irrevocable life insurance trust in order to keep it out of the taxable estate, then it is clearly enough value to justify the slightly more expensive Dynasty Life Insurance Trust.
Put another way, if saving estate taxes at the first generational level is valuable to the client’s family, then it certainly is similarly important to also save estate taxes on the life insurance death benefit at the next generational level and each successive generational level thereafter. The combination of the leveraged life insurance death benefit with the leveraged estate tax savings creates a huge fund for the client’s descendants.
An estate planning attorney or life insurance agent who presents the Dynasty Life Insurance Trust concept to a prospective client stands to outdo any competition for that client’s business. If I were the client and one advisor told me to use a Dynasty Trust and another advised me only to use a single generation life insurance trust, I would certainly hire the one who gave me the Dynasty Trust advice since I would have more confidence in the advisor who is looking out for my family’s long-term future.
UEP: I agree with your analysis. Can you describe the funding of the Dynasty Trust when purchasing life insurance?
Steve Oshins: Absolutely. There are a number of ways to fund the Dynasty Trust to pay the insurance premiums. The most common way to fund it is with annual exclusion gifts. This is often called a “Crummey trust”, named after a 1968 case called Crummey v. Commissioner.
A Crummey trust is funded with gifts in which the trust provides that certain beneficiaries are given an immediate withdrawal power over those gifts. By giving the beneficiaries this power, the gifts qualify for the annual exclusion and thus do not use any of the settlor’s million dollar gift tax exemption. As of right now, each settlor is allowed to gift up to $13,000 per year per beneficiary under the settlor’s annual exclusion. If the settlor’s spouse elects to gift-split on a timely filed gift tax return, the allowable annual gifting amount is doubled.
Even though no gift tax exemption is used, this is not the rule for generation-skipping transfer tax (“GST tax”) purposes. For GST tax purposes, the settlor must apply some of his GST tax exemption to 100% of the gifts. This is because the annual exclusion rules are different for GST tax purposes.
UEP: In the first installment of this interview, we talked about the benefits of utilizing a lifetime irrevocable Dynasty Trust in order to protect gifted assets from estate taxes, as well as from beneficiaries’ creditors and divorcing spouses. Are the Dynasty Trust assets always protected from all creditors, or does it depend upon the terms of the Dynasty Trust?
Steve Oshins: It depends upon the terms of the Dynasty Trust. For example, some attorneys draft Dynasty Trusts with mandatory income distributions to the trust beneficiaries. This makes the income distributions attachable by the creditors of the beneficiaries and thus should not be recommended to clients who are concerned with creditor protection.
Many Dynasty Trust “forms” follow this mandatory distribution philosophy which is why it is important for an experienced attorney to draft the trust. Because attorneys are generally taught to work within the confines of their forms, less experienced drafting attorneys often don’t recognize that better provisions can be drafted into a Dynasty Trust.
UEP: You have talked in the past about two different ways to draft a stronger Dynasty Trust. You have referred to them in the past as the “best way” and the “second best way”. Please start by describing the best way to draft a Dynasty Trust for creditor protection purposes.
Steve Oshins: There are two basic options. With both of these options, the Dynasty Trust can be drafted as a Beneficiary Controlled Trust, which is a term that I use to describe a trust that is controlled by the primary beneficiary of the trust.
The best way to draft a Beneficiary Controlled Dynasty Trust for creditor protection purposes is to draft the trust as a purely Discretionary Trust. For maximum creditor and divorce protection, an independent trustee is used to make discretionary distributions and other tax sensitive decisions. The primary beneficiary can be given the power to remove and replace the independent trustee, with or without cause. Additionally, the primary beneficiary can be the investment trustee and thus can make all investment decisions over the trust assets.
Because of this drafting approach, the primary beneficiary has the control over and use of the trust property as though he owned it free of trust even though the trust assets are protected from estate taxes and from the beneficiary's creditors, including divorcing spouses. This co-trusteeship, although slightly more complex than having just one trustee, provides the ultimate combination of control, estate tax savings and creditor protection.
UEP: That is a great approach and one that our clients should all consider. Now please describe the “second best” approach that you can use to provide creditor protection.
Steve Oshins: The second approach is to draft the Dynasty Trust as a Support Trust. With this option, the primary beneficiary can be the sole trustee so long as his distribution powers are limited to an ascertainable standard. The ascertainable standard approved by the tax code (without causing the trust assets to be included in the beneficiary’s taxable estate) is one which allows distributions for the beneficiary’s health, education, maintenance and support.
Although a Support Trust is simpler to administer than a purely Discretionary Trust, certain creditors of the beneficiaries of a Support Trust may access the trust assets, so it is less protective from creditors than is a Discretionary Trust. One such creditor that can often pierce through a Support Trust is a divorcing spouse of a beneficiary which is why the Discretionary Trust is the superior option. The creditors that can pierce through a Support Trust can do so either by specific state statute or as determined judicially.
The reason the Discretionary Trust doesn’t have this problem is that it doesn’t need to rely solely on its spendthrift provision to obtain its creditor protection. Rather, its assets are protected because of the full discretion given to the distribution trustee. Because the distribution trustee has full discretion over distribution decisions, the Dynasty Trust beneficiaries do not have a property interest over the trust assets and thus the creditors of those beneficiaries cannot obtain a property interest.
UEP: We’ve talked about the benefits of passing assets using a Dynasty Trust and how to draft the Dynasty Trust for maximum protection from estate taxes, creditors and divorcing spouses.
One of the most effective - - and often overlooked - - uses of a Dynasty Trust involves the transfer of a hot business or investment opportunity. Would you please describe this technique for our readers?
Steve Oshins: I call this technique “Opportunity Shifting”. It is the ideal strategy to use when your client has a hot business or investment opportunity because the client, by shifting the opportunity to a Dynasty Trust, can protect it from estate taxes, creditors and divorcing spouses for multiple generations.
The Opportunity Shifting technique is very simple. We have our client ask his parent or grandparent to set up and fund a Dynasty Trust for the benefit of our client and his family. Our client is the investment trustee and can select the distribution trustee. As investment trustee, our client uses the money gifted from his parent or grandparent to start the new business opportunity as an asset owned by the Dynasty Trust.
UEP: This sounds very simple and straightforward. Why isn’t everybody doing it?
Steve Oshins: That’s the big question. In fact, the Opportunity Shifting technique is so simple that it is shocking that there aren’t more estate planners and asset protection planners creating these for their clients every day. I suspect that planners just don’t think about it. But once they hear about it, it is so obvious and so easy to implement that they start using it all the time.
UEP: Does this Opportunity Shifting technique work for an existing business or investment, or must it be a new business or investment opportunity?
Steve Oshins: It must be a new business or investment opportunity. Otherwise, the IRS will treat the beneficiary as having made a gift to a trust for his own benefit which would cause the trust to be included in that beneficiary’s taxable estate and would open the trust assets up to the beneficiary’s creditors and divorcing spouses.
It is very important not to shift an asset to the trust if the asset already has value. If the business or investment already has value, then, rather than Opportunity Shifting, the beneficiary may instead be able to sell the business or investment to the Dynasty Trust for cash or for a promissory note.
UEP: I understand that the Opportunity Shifting concept is very useful as a divorce protection technique. Please explain how this can be used in that context.
Steve Oshins: Not even considering the significant estate tax reasons for Opportunity Shifting, divorce protection in and of itself is a great reason to have such a trust. Even if the client has a prenuptial or postnuptial agreement, the client’s assets are at risk if the agreement is found to be too one-sided or was signed under coercion.
Using the Opportunity Shifting technique, the client can avoid increasing his net worth and his marital estate that is potentially divisible upon a divorce. Even if the client resides in a community property jurisdiction, not only are the Opportunity Shifting Dynasty Trust assets not community property, but they’re not even separate property. Rather, the assets are trust-owned property which is not subject to a divorce if the Dynasty Trust is properly drafted. For this reason, every successful entrepreneur should have an Opportunity Shifting Dynasty Trust.
UEP: We want to thank you for taking the time to provide our readers such important information! We know you are very busy with your practice and assisting numerous advisors and attorneys with their clients, so we appreciate your time.
Steve Oshins: You’re welcome! It is my pleasure to be here with you today.
UEP: If you would like to get some additional training on Dynasty Trust, as well as take a look at some of the educational teleconferences that Steve has done for us that is still available for purchase, please click here. You can also download a free resource from Steve by visiting our Free Resources page. Also, stay tuned for some great sales tools that we will be rolling out with Steve very soon!
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Photo Credit: oshins.com