By Steven J. Oshins, J.D., AEP (Distinguished)
Most trusts are designed as Staggered Distribution Trusts which are trusts that make mandatory distributions to the beneficiaries upon reaching certain ages. For example, many trusts pay out one-third of the assets upon the beneficiary reaching age 25, one-half of the balance upon the beneficiary reaching age 30 and the balance upon the beneficiary reaching age 35. The philosophy used by the scriveners of these types of trusts is that the beneficiaries have multiple opportunities to learn from their mistakes.
Those who recommend Staggered Distribution Trusts fail to properly consider the estate tax and creditor, divorcing spouse and bankruptcy exposure that occurs as a result of the mandatory distribution structure. This view is often based on a misunderstanding of the amount of control that can be given to a beneficiary as a trustee of the trust. Unfortunately for the client, the failure of the advisor to recognize that the financially competent beneficiary can be given control as trustee of the trust (herein a “Beneficiary Controlled Trust”) often leads to unnecessary exposure to estate taxes, creditors, divorcing spouses and loss of assets in a bankruptcy.
Thus, many trusts are drafted as Beneficiary Controlled Trusts which are trusts in which the primary beneficiary is either the sole trustee or is the investment trustee and serves with a co-trustee who has the power to make distributions and who the primary beneficiary has the power to fire and hire. The Beneficiary Controlled Trust is designed to provide the primary beneficiary with all of the rights, benefits and control over the trust property that he would have had if he owned it outright, in addition to tax, creditor and divorce protection benefits that are not obtainable with outright ownership.
This concept should not only be applied to the children’s generation, but also to the grandchildren’s generation, the great-grandchildren’s generation and more remote generations depending upon the applicable state perpetuity restrictions. An irrevocable trust that is set up to continue for as long as the applicable state perpetuities laws allow is commonly known as a Dynasty Trust. About half of the states allow the trust to continue for approximately 120 years (depending upon certain deaths), while the other states will allow a much longer term of years, or even forever in some jurisdictions. Many clients will choose to domicile the Dynasty Trust in the client’s home state, while others will select a superior state by adding a co-trustee from that jurisdiction.
Many people would conclude that Alaska, Nevada and South Dakota are the leading Dynasty Trust states. Each of these states has no state income tax, has a long perpetuity statute and doesn’t have any exception creditor statutes or case law allowing any classes of creditors to pierce through the trusts. Those clients who choose this option will generally appoint a bank or trust company in the selected jurisdiction as a co-trustee in order to obtain the favorable jurisdiction.
DOWNLOAD 2ND ANNUAL DYNASTY TRUST STATE RANKINGS CHART
(Released October 1, 2013)
The 2nd Annual Dynasty Trust State Rankings Chart was released on October 1, 2013. The chart ranks South Dakota as the leading Dynasty Trust state with Alaska and Nevada in a tie as the second leading Dynasty Trust states.
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ABOUT THE AUTHOR
Steven J. Oshins, Esq. is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by The Trust Advisor. Mr. Oshins can be reached at 702-341-6000, ext.2 or at firstname.lastname@example.org.