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Becoming successful at entrepreneurship sets you up for a problem later in life: estate taxes. It’s easy to accept that you can’t take it with you, but you want to leave your opus intact, without the taxman taking 30% to 40% off the top on top of the tax you have already paid on the largesse. That’s a much harder thing to accomplish if you’re a very wealthy entrepreneur.
Success is a relative measurement. For the purpose of this review, you won’t need to be too interested in a Dynasty Trust if your estate will be $20 million dollars or less. Unless your estate exceeds that threshold, the Dynasty Trust does not provide the benefits it otherwise would. If your estate meets the threshold, however, the Dynasty Trust becomes an extremely important financial tool in keeping the bulk of your estate free from the rapacious estate tax.
The U.S. estate tax code has been designed from its very beginnings to heavily tax personal fortunes. The U.S. tax code serves to incentivize certain behavior or arrangements and to disincentivize others, and it has always discouraged family dynasties like those found in Europe when the 13 American colonies were forming a revolutionary government. Among the tactics used were mandatory minimum distributions, state and federal taxes on income and gains, and mandatory limitations on how long the Trust could continue to remain in existence.
The turning point came in 1986 when Congress changed the Generation Skipping Transfer Tax (GST). Coupled with that federal shift, Delaware (and two other states) abolished an incredibly complex legal tenant known as the “Rule against Perpetuities.” The Rule, in place for centuries, sought to prevent “dead hand control” of assets, meaning control over the permitted uses and handling of an estate through a trust lasting for generation after generation without an expiration date. Delaware also led the way by eliminating the requirement that trusts make mandatory minimum distributions. The combination of these three developments, coupled with the ingenuity of some very smart Delaware lawyers, led to the creation of the Dynasty Trust.
Estate planners for the wealthy love the Dynasty Trust and took to it almost immediately in planning for high net worth estates. It is now a standard tool to save the wealth of super successful entrepreneurs as they pass their appreciating assets on to their heirs for generations to come. Tax experts agree that the tax benefits of a Dynasty Trust are maximized when the investments are highly appreciating assets, such as the stock of a rapidly growing entrepreneurial business.
Setting up a Delaware Dynasty Trust is something you should not attempt without top-tier legal advice and/or a licensed Delaware Trust Company. Since the purpose is mainly to protect the breakup of your interest in your company, you want this to outlast legal challenges long after you’re gone, and that can only be assured by appointing a long-lasting traditional law firm.
Management of the assets of the company are usually handled by a licensed Delaware Trust Company and are governed under the “Prudent Investor Rule,” another Delaware advantage which mandates that Trust Company’s treat assets with at least the care that a prudent investor would exercise. This gives the trustee broad powers to make investment decisions while still holding the trustee to a standard of care. To curb this latitude, Delaware also allows directed trusts, in which the settlor or someone else the settlor designates can make the investment decisions under restrictions placed by the settlor.
Delaware courts are known for respecting the privacy of trust documents and arrangements so you can be sure your instructions will not be available to the public, as in some other states. Along with protection of assets and avoidance of punitive taxation, Delaware recognizes that discretion and privacy are paramount when dealing with a family’s internal wealth management arrangements.
Taxation by the State of Delaware is also beneficial. While Delaware does impose tax on Delaware residents, it does not levy capital gains taxes or income taxes on non-Delaware residents.
So, if you’re a successful entrepreneur, you’ll want to look into the Delaware Dynasty Trust for your long-term estate planning so that you can focus on building your business today, assured of your estate’s security in the future.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such sourceâ€™s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There are 2 comments left for The Delaware Dynasty Trust: Another Delaware AdvantageHon Lee said: Saturday, May 2, 2020
What are the main advantages of Delaware vs say Nevada, South Dakota, Florida or New Hampshire for dynasty trusts?HBS Staff replied: Monday, May 4, 2020
Thank you for the question. We specialize in Delaware entities and this research is beyond our scope. When Delaware makes a great stride forward with situations like these other states attempt to copy the Delaware law, but they usually do not include all the advantages of the Delaware version.kevin exum said: Wednesday, April 15, 2020
I am interested in speaking with someone about the Delaware trust for some of my real estateHBS Staff replied: Thursday, April 16, 2020
Unfortunately we cannot assist with creating a trust for you. We would be happy to help you put your real estate holdings into LLCs if you would like to pursue that strategy. For a trust, we recommend you speak with an attorney to assist.