For families that accumulate a significant amount of wealth, a dynasty trust can provide an effective vehicle for transferring that wealth to later generations on a consistent basis. In addition, depending on the way the trust is structured, it may act as an asset protection trust, with certain benefits for reducing exposure to liability.
You can work with New Mexico Financial & Family Law to evaluate all of your options for setting up a trust and gifting your financial legacy to those you care about most — as well as to future generations you may never even meet. We may recommend a dynasty trust for families that want to ensure consistent inheritances across multiple generations, or we may suggest another type of trust based on your unique goals.
Find out more about how to prepare for your financial future — and the future of generations after you — when you reach out to schedule a no-obligation case review. Call 505-503-1637 or contact us online today to schedule your consultation with an experienced New Mexico Dynasty trust lawyer near you.
Since the 1970s, gifts to relatives who are two or more generations younger than the gift-giver (i.e., grandchildren and younger generations) could trigger a generation-skipping transfer tax or GSTT. At the time this policy was created, revenue services felt that such transfers avoided an entire generation of taxes, compared to if the assets were transferred to children and then grandchildren, one generation at a time.
A dynasty trust allows an individual to use their lifetime GSTT exemption, along with other gift and estate tax exemptions, to create a reliable instrument that can transfer assets for multiple generations with significant overall tax savings. More importantly, once the trust is created, these transfers can happen for many years to come — sometimes centuries, depending on the laws of the state where the trust was created.
New Mexico Financial & Family Law can assist your family with setting up a dynasty trust to preserve your financial legacy for multiple generations after you. Once the trust is created, it can automatically transfer assets (or income derived from asset appreciation) to descendants.
Rules can be set up to instruct how these distributions will occur generally.
For example, the wording of the trust can state that any descendent of the trust creator will automatically receive distributions on a per stirpes basis.
Per stirpes is a Latin phrase that literally means “by the branch.” It refers to a legal concept where all younger generations are able to receive an inheritance divided equally among those in their generation.
Further, if a future beneficiary dies before they receive an inheritance, their children are still eligible to receive the distribution at the appropriate time.
There are a number of key concepts to note regarding a dynasty trust, how it’s created, and how it operates once it is in place.
These concepts apply to many different types of trusts, but what makes a dynasty trust unique is that it is designed to last multiple generations. In order for this to happen, the trust must be formed in a state that does not have a rule against perpetuity, or that has an extended length to its rule against perpetuity.
Many states have formed rules that basically make it impossible for a trust or other type of non-vested financial interest to exist forever. Typically, the trust can only exist for 21 years after the death of a specifically named person who was alive when the trust was created.
Other states have changed or revoked these rules so that a trust can last for an extremely long period of time — or even forever.
Nevada, for example, allows for trusts to exist for 365 years. Wyoming allows them to last for 1,000 years. South Dakota allows trusts to last perpetually.
For this reason, the state where your trust is formed and managed can have a huge effect on its longevity and its ability to provide funds to future generations.
New Mexico, currently, has a statute that allows for real estate trusts to have “perpetual succession.” Trusts containing other assets may need to be handled carefully, or setting up a dynasty trust in another state may need to be considered.
Another important concept to note is that nearly all states restrict the ability of a grantor or testator to control how assets are used past its defined rule against perpetuity. Dubbed “the dead hand” rule, its intention is to prevent those who have been long-deceased from excessively restricting the use of their assets in perpetuity.
If the grantor is not concerned about creditors being able to make claims against assets held in their dynasty trust, then they can give permission to access the contents of their own trust or to make modifications to it. For example, the grantor could be allowed to withdraw up to a certain amount of money or to make changes to an investment portfolio held in the trust.
However, since these assets are usually designated as part of their lifetime exemption for GSTT, gift, and estate taxes, they would essentially be using assets that had already been set aside for their heirs. This use may not be troublesome, especially if the amount used is only a tiny percentage of the entire trust, but it is worth noting.
Optionally, the grantor can decide to count income earned by the trust as personal income in order to pay federal taxes on it. This arrangement is referred to as a “grantor trust.”
Paying these taxes reduces the cost of taxation for future generations since the taxes would normally be paid as part of these beneficiaries’ personal income tax once they receive the money.
Notably, while these payments offset the costs for future generations, they do not count towards the grantor’s lifetime gift tax exemption.
A spendthrift clause controls how the money in a trust is spent while preventing beneficiaries from transferring their interest in the trust to another party. In other words, a beneficiary can’t pay off a debt by promising their creditor future payments from the trust.
This type of restriction prevents the trust from being used as a general-purpose fund, barring any preemptive claims on distributions prior to their transfer to a beneficiary.
In order to protect assets held in a dynasty trust from creditor claims, the assets have to be legitimately and legally separate from the beneficiary until they are distributed. Beneficiaries should not be given discretion to transfer a large percentage of the trust to their ownership at any given time, for example.
Further, the grantor should not have the ability to access the trust without needing the permission of their beneficiaries if they want the assets to be shielded from creditor claims.
Speak to a New Mexico dynasty trust lawyer to learn more about how to structure your dynasty trust as a domestic asset protection trust.
Yes. New Mexico has a statute in the probate code against restricting property ownership in perpetuity where a non-vested interest cannot be reserved for more than 90 years or more than 21 years past the death of an existing person who must be specifically named in the will (or trust).
At the same time, New Mexico does not have a state inheritance or estate tax. These qualities make it favorable for individuals who wish to give to the next few generations but not those born hundreds of years into the future.
A dynasty trust can be funded using any assets held in the grantor’s name, including:
The wording of a trust determines how, how much, and how often distributions are made to beneficiaries.
One option would be to transfer a certain amount of the cash value of the trust to heirs once they reach a certain milestone, such as turning 18 or graduating with a four-year degree. Another option could be to provide multiple distributions, called annuities, during the lifetime of the beneficiary.
The grantor can set rules on whether a distribution occurs based on the lifestyle of the beneficiary. For example, the beneficiary may be required to graduate from a four-year college or maintain a full-time job in order to receive a transfer.
It is up to the trustee to obey these rules, and because the trust is irrevocable, they often have sole discretion to decide when to make a distribution.
Because dynasty trusts are designed to last for multiple generations, it is wise to be thoughtful about the language used when instructing how the assets will be managed or when distributions will occur.
For example, the trust should generally refer to subsequent generations rather than specific family lines in case a new heir is born that the grantor didn’t know about during their lifetime.
Further, the grantor should imagine a wide range of situations that would allow for money to still be transferred to their future unknown beneficiaries, such as by making sure that adopted children are eligible to be considered as descendants rather than using language that would exclude anyone not birthed directly from a beneficiary.
The grantor will also want to avoid including language that could end up being obsolete, such as instructing investment for certain companies when these companies may not exist for the duration that the trust is intended to remain intact. Further, the grantor may not want to assume that a business interest they held during their life, such as a retail store, will remain solvent for multiple generations to come.
Trust language should be flexible enough to accommodate a wide range of possible situations, in other words. This recommendation is why it can be so beneficial to work with a dynasty trust lawyer in New Mexico when creating your trust since they can help you use language that anticipates a wide range of possibilities.
The total amount someone can exempt in all federal transfer taxes in 2024 (the time of writing of this article) is $13.61 million. This amount doubles to $27.22 million when considering the collective estate of a married couple.
Individuals are allowed to directly gift someone up to $18,000 per year ($72,000, for couples), which will deduct from their lifetime exemption amount. They can also transfer assets into a trust prior to or at the time of their death up to the remaining exemption amount that they have.
Yes. Income distributed from the trust counts as personal income for federal tax purposes, and it may also count toward the recipient’s state income. However, the grantor can count the increases in value as their own income, paying taxes on it directly at a lower rate than estate taxes without affecting their lifetime estate tax exemption amount.
Ideally, a trust will be structured so that it is self-maintaining and able to preserve its value for many generations to come. However, it may also be possible that the trust will deplete in value over time. In these cases, the trust will cease to exist once it no longer contains assets to fund it.
The risk of depleting the trust should inspire creative and critical thinking on the part of the grantor. Do they want to limit the amount distributed each generation, for example, so that some value is guaranteed to last for the next generation, or are they willing to wind down the value of the trust in the hopes that the family can create a new one for their lineage to live off of?
Answering questions like these can help you create a trust that makes you confident that you will achieve the type of future you want to see for your family many generations into the future.
Because a dynasty trust is intended to last so long, it is possible for a company designated as a trustee to not survive the entire duration that the trust exists. In the case of individuals, it is a simple fact of nature that the trust will outlive them.
In order to maintain reliable management and oversight of the trust, including over-time distributions, you will want to select a series of possible trustees to manage the trust. You can also specify selection criteria so that, in the event that trusteeship must be transferred away from a company that is dissolving, the company has a fiduciary duty to select a worthy successor.
From deciding how to word your trust to selecting a succession of trustees you can rely upon for many generations ahead of you, there are many important decisions to make when creating a dynasty trust.
A skilled New Mexico trust lawyer can help you make all of these estate planning decisions with confidence. Our most important goal is to make you excited about the future of your family, giving you peace of mind knowing that your legacy can provide fertile ground for future generations of entrepreneurs, loving parents, and lives well-lived.
Find out more about dynasty trusts and other wealth transfer vehicles that can benefit your family during a no-obligation case review. Schedule your confidential consultation today when you call us at 505-503-1637 or contact us online.
CallCall now to schedule your consultation 505.503.1637
Office