Every once in a while we hear rumors that lawmakers might make changes to our tax laws that would affect planning involving Legacy Trusts. We heard this about a year ago, and new rumors have been heard on the same subject very recently.
A Legacy Trust (also known as a Dynasty Trust or Generation Skipping Trust or GST Trust) is a trust set up in a state that has repealed the “rule against perpetuities” so that the trust can remain in place for multiple generations. In Nevada, a Legacy Trust can exist for up to 365 years. These trusts are typically designed so that the assets held by the trust are not included in the estate of any beneficiary of the trust and therefore the trust is not subject to the federal estate tax during the duration of the trust. For example, if $5 Million were funded into a Legacy Trust today and if those funds could appreciate consistently at 6% and not be subject to multigenerational transfer taxes (estate tax), then the trust would be worth $92 Million in 50 years.
Now for the scare tactics: We strongly suspect that we have a limited opportunity to take advantage of the $5 Million gift tax exclusion that is set to expire at the end of 2012. [We blogged about that subject here]. If lawmakers also somehow remove the advantages of a Legacy Trust in the coming years, then today is the perfect opportunity to engage in some estate planning that will utilize a Legacy Trust for your children and grandchildren. A trust that is established and that is funded with assets would be almost certainly “grandfathered” in the event of a change in the laws. We feel that now is the best possible time to engage in this type of planning.