Go West (and go soon) for Dynasty Trusts.
The top states for these products are South Dakota, Alaska, Nevada, according to Steve Oshins, an attorney in Las Vegas who played a role in the creation of Nevada’s dynasty trust law.
Oshins gave South Dakota, Alaska and Nevada scores of 97, 95.5, and 95, respectively, in his tabulation, well ahead of the fourth highest ranked stake, Tennessee, which scored an 88, and the fifth highest ranked, Delaware and Wyoming, which both scored 79.
“The only significant difference among the top three states is the possible length of the trust,” Oshins said. “You can have a perpetual trust in South Dakota and generally a 1,000-year trust in Alaska, while Nevada has a 365-year limit. Unless a client is concerned about the 366th year, the best choice may be the one with the lowest annual fee to the trustee.”
Besides trust life span, other factors going into Oshins’ rankings include state income taxes, creditor protection, and protection in divorce settlements.
A dynasty trust is structured to generate shelter from creditors and from estate tax for future generations. “A client with a $1 million net worth might benefit from such a trust,” Oshins said, “but it probably would take a larger net worth to make it worthwhile to go out-of-state to a recommended jurisdiction and pay the trustee fee, which could be thousands of dollars a year.”
A client living in New York who wants a Nevada dynasty trust wouldn’t have to move assets, he said, but would have to sign an agreement with a Nevada trustee, perhaps a bank or trust company. To qualify as a Nevada trust, the local firm might be named as co-trustee, with a say over trust distributions.
Oshins said that advisors with clients who might be interested in a dynasty trust should suggest acting before year-end. The lifetime gift tax exclusion is now $5.12 million, or $10.24 million for a married couple, but that opportunity for generous transfers to a dynasty trust is scheduled to end in 2013. “This year and last have been the only times in history with a lifetime gift tax exemption over $1 million per person,” he said, “so it’s logical to expect some reduction next year. For the past couple of months, we have been doing three times as many dynasty trusts as we usually do.”
According to Oshins, dynasty trusts are often funded by life insurance. “I tell people who sell life insurance that when they recommend an irrevocable life insurance trust (ILIT), they almost always should suggest a dynasty ILIT,” he said. With a standard ILIT, the proceeds are gradually paid to the beneficiaries as they reach certain ages, but a dynasty ILIT retains the assets for continuing beneficiary protection.