Also known As a Generation-Skipping Trust
Ethan R. Okura
Hawai‘i Herald Columnist
Recently the term “dynasty trust” has become popular in the news and in the financial world. Many of us hear the word “dynasty” and think of an empire, or perhaps a family of billionaires. When I moved back to Hawai‘i after finishing law school in New York City, my father Sanford K. Okura, convinced me of the advantages of a generation-skipping trust. “Dynasty trust” is just a new name for what lawyers have traditionally called a generation-skipping trust.
A generation-skipping trust is one that continues for the lifetime of the beneficiary, and even longer. In some states a generation-skipping trust is allowed to continue forever. Hawai‘i started to allow certain trusts to last forever for the first time in 2010. A generation-skipping or dynasty trust can give asset protection to beneficiaries, such as children and grandchildren.
With an ordinary revocable living trust, when the parents die, assets are distributed out of the trust to the children. For example, suppose that a mother has an ordinary revocable living trust. When she dies, the trust ends. All of the assets in the trust go to her daughter. In this example, her daughter has a husband and two children. Then the daughter dies later. All of the assets that she inherited from her mother go to the daughter’s husband. The daughter’s husband gets remarried. When he dies, all of the inheritance that the mother left for her daughter now goes to the daughter’s husband’s new wife! The daughter’s own children get nothing. The assets have gone outside of the family line to a stranger.
Instead of dying, suppose that instead, the daughter got divorced. In the divorce, the daughter’s husband may try to get some of the inheritance that the daughter’s mother gave to her. If she put her husband on the title with her, then the husband can get half of those assets in the divorce. Even if the daughter does not put her husband’s name on the property, in the divorce, he may be able to get one-half of the appreciation (or increase in value) of the property.
For example, suppose that when the mother died, her daughter inherited her mother’s house worth $300,000. The daughter keeps the house in her own name. Several years later she gets a divorce. At the time of the divorce, the house is now worth $800,000. Since the house was worth $300,000 when she inherited it, in the divorce, the daughter gets to keep $300,000 worth of the house. However, since the house has grown in value $500,000 during her marriage, in the divorce, her husband may be able to go after half of that $500,000.
Another problem that most people don’t think about is estate taxes, not when parents die, but when the children who inherit the property die. Suppose that the daughter is 50 years old when she receives her inheritance from her mother and that the inheritance is worth $800,000. The daughter lives for 30 more years. At the time of her death, the $800,000 inheritance she received from her mother is worth millions. We do not even know what the estate tax laws will be two or three years from now. We have absolutely no idea what the estate tax laws may be 30 years from now. However, if there is an estate tax when the daughter dies 30 years from now, then the inheritance her mother gave her will increase the daughter’s estate tax problems.
Let’s take another example. The mother dies and leaves an inheritance for her daughter worth $800,000. The daughter has teenage children who just started driving. Her son (the mother’s grandson) was texting and driving, and caused a terrible car accident where people were severely hurt. The grandson was driving a car registered in his mother’s name. The injured passengers in the other car hired a lawyer to file a lawsuit suing her as the owner of the car and parent of her son, and the judge and jury will award all of the inheritance that the mother left to her daughter to the other passengers.
The generation-skipping trust (or dynasty trust) has these advantages: 1) If the daughter dies, the inheritance she received from her mother is guaranteed to go to the grandchildren, rather than to the daughter’s husband; 2) If the daughter gets divorced, her husband cannot take away the inheritance that the daughter received from her mother; 3) The assets in the generation-skipping trust will not be taxed by the estate tax when the daughter dies; and 4) If designed properly, the assets in the generation-skipping trust will be protected from lawsuits.
This is why the generation-skipping trust, or dynasty trust, is becoming popular. It gives asset protection to the person who inherits the assets. In next month’s column, I’ll go into greater detail about the advantages and disadvantages of the generation-skipping trust/dynasty trust.
© OKURA & ASSOCIATES, 2023
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Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate-planning to protect assets from nursing home costs, probate, estate taxes, and creditors.
This column is for general information only and is not tax, financial, or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate-planning specialist.