How Much Control from the Grave Can Parents Have?

Parents who want to protect their home from being sold by heirs can do so by way of a dynasty trust, but it gets complicated, explains the Santa Cruz Sentinel’s article “Not a good idea to keep home in ‘dynasty trust.’” Every situation is different, so every family considering this strategy should meet with an estate planning attorney to learn if this is a solution or an added complication.

Why would the parents want to make their children’s lives complicated? Perhaps they think the children are likely to end up in a bad situation, and they are attempting to provide a safe landing for what they believe is inevitable. Or they simply cannot manage the idea, that one day the house won’t be part of the family.

The house can be protected from a sale, through the use of a revocable trust. Instead of distributing the home in equal shares among their children, along with all of their other assets, the house can be put in the trust and their trust can continue after their deaths. The trust can include any restrictions they want, with respect to how they want the home to be maintained after their deaths.

They can even put their home into a dynasty trust. Done correctly, a dynasty trust can hold the property for the children, grandchildren and great-grandchildren. However, there are some issues.

First, if the home is held in trust, it means that the trust must be funded, since there will be expenses for the home, including maintenance and upkeep. Unless the home is used as a rental property, there won’t be any income to pay for these expenses. The parents will need to leave a significant amount of assets in the trust, so that big and small items can be paid for, or the children may be charged with paying for the expenses.

Next is the problem of capital gains taxes. When the parents pass, the home receives a stepped-up cost basis. That means that when the property is eventually sold, the amount of capital gains tax and in this case, California income tax due, will be based on the increase of the value of the property since the surviving spouses’ date of death.

If the home is held in trust until all of the siblings have died, the value of the house will likely have increased dramatically. Where is the money to pay the taxes coming from? Will the house need to be sold to pay the tax?

What if one of the children decides to move into the house and lets it get run down? The other two siblings may never receive their inheritance. There are so many different ways that this could lead to an endless series of family disputes.

Keeping a “spare” house may not be realistic. It may force the children to become rental property managers when they don’t want to. It may exhaust their finances. In other words, it may become a family burden, and not a place of refuge.

Talk with an estate planning attorney. It may be far better to distribute the home outright to the children along with other assets and let them decide what the best way forward will be.

Reference: Santa Cruz Sentinel (December 1, 2019) “Not a good idea to keep home in ‘dynasty trust.’”

Use A Dynasty Trust to Protect Your Wealth

Using an irrevocable trust ensures a far smoother transition of assets than a will, and also offers significant tax savings and far more privacy, control and asset protection, begins the article “Dynasty Trusts: Best Way to Protect Family Wealth” from NewsMax.

Just as their name implies, a dynasty trust is king of all trust types. It gives the family the most benefits in all of these areas. Still not convinced? Here are a few reasons why the dynasty trust is the best estate planning strategy for families who want to preserve an estate across many generations.

Most trusts provide for the transfer of assets from one benefactor to the next generation, at most two or three generations. A dynasty trust can last for hundreds of years. This offers tax advantages that are far superior than others.

Under the new tax laws, an individual can gift or bequeath up to $11.4 million during their lifetime, tax free. After that limit, any further transfer of assets are subject to gift and estate taxes. That same transfer limit applies whether assets are left directly via a will or indirectly through a trust. However, in a direct transfer or trust, these assets may be subject to estate taxes multiple times.

If a grantor transfers assets into a dynasty trust, those assets become the property of the trust, not of the grantor or the grantor’s heirs. Because the trust is designed to last many generations, the estate tax is only assessed once, even if the trust gets to be worth many times more than the lifetime exclusion.

Not all states permit the use of dynasty trusts. However, five states do allow them, while six others allow trusts with lifespans of 360 years or more. An experienced estate planning attorney will know if your state permits dynasty trusts and will help you set one up in a state that does allow them, if yours does not. Nevada, Ohio and South Dakota provide especially strong asset protection for dynasty trusts.

Because dynasty trusts are passed down from generation to generation, trust assets are not subject to the generation-skipping transfer tax. This tax is notorious for complicating bequeathals to grandchildren and others, who are not immediate heirs.

When the dynasty trust is created, the grantor designates a trustee who will manage trust funds. Usually the trustee is a banker or wealth manager, not a trust beneficiary. The grantor can exert as much control as desired over the future of the trust, by giving specific instructions for distributions. The trustee may only give distributions for major life events, or each heir may have a lifetime limit on distributions.

With these kinds of safeguards in place, a benefactor can ensure that the family’s wealth extends to many generations. Speak with an estate planning attorney to learn about the laws concerning dynasty trusts in your state and see if your family can obtain the benefits it offers.

Reference: NewsMax (September 16, 2019) “Dynasty Trusts: Best Way to Protect Family Wealth”