A Dynasty Trust in Roselle and Schaumburg Can Help Leave Your Assets to Your Grandchildren – Not the Government!
A lot of people complain about high taxes. Looking at what the government takes from your weekly paycheck can be frustrating. But, it could be worse. Even people who don’t complain about taxes (there are a few) and understand it takes money to run the government would complain if they understood that it is possible for the government to tax the same money over and over and over. And, it happens more than you think.
Here’s a scenario:
You and your spouse leave a very large amount of money to your daughter without a trust – or, in a poorly drafted trust (yikes!). The money is taxed when it is transferred to your daughter. Your daughter leaves money she inherited to your grandchildren without a trust. Guess what? You’ve got it – that money is taxed again!
It is upon learning this that a well-meaning grandparent suggests leaving the money to their grandchildren rather than the child to avoid one of those tax events. Not so fast! In that scenario the federal generation-skipping transfer tax could apply.
Here’s another scenario:
You and your spouse leave $10 million to your child. If her inheritance grew over time, it would be subject to the estate tax at her death. That could result in millions going to pay estate tax.
There is a solution that could be used to stop the government from double-dipping. It’s called a Dynasty Trust. Assets that you put in a dynasty trust, plus any interest earned over the years, are still subject to federal estate tax, but just once – when you transfer them into the trust. The assets will not be taxed again even though several generations can benefit from them.
It’s important to note here that income taxes are still due on any income that is generated by the assets in the trust. Therefore, most people choose to put assets that do not earn money in the trust, such as growth stocks that don’t pay dividends and life insurance policies.
Dynasty trusts are complex legal documents, so they should be prepared by experienced estate planning lawyers in Roselle and Schaumburg who have experience with trust and tax planning strategies. If you are interested in talking with an attorney with this experience, call our office at 630-908-2752 to set up a consultation.
An unexpectedly common problem Schaumburg estate planning lawyers encounter is how the proceeds of an estate are handled when the beneficiary gets divorced. We don’t want to think of our children dealing with the pain of a divorce, but losing the inheritance you left behind would certainly pour salt in the wound. That’s why more estate planning lawyers are working to help clients ensure that their children get what should rightfully be theirs.
Each state has its own rules regarding what happens to inherited funds in the case of a divorce, so you want to be sure to do your planning with a knowledgeable Schaumburg estate planning lawyer. While the need to build in some safety mechanisms may be more obvious when you don’t like your son- or daughter-in-law, it’s important to remember that the future is uncertain and the only constant is change. Having a contingency plan in place just makes sense.
Why is this a big deal? Take the example of a fictitious Schaumburg couple. The wife inherits $100,000 from her parents. According to estate planning law in many states, the $100,000 will probably be protected in the case of a divorce and will revert to the wife. On the other hand, if that money had been invested in some way that caused it to grow, anything over the initial $100,000 could be considered marital property and be subject to divorce procedures.
One of the ways that an estate planning lawyer in Schaumburg will likely suggest avoiding this outcome would be to create a well thought-out trust. In order to do this, the trust would be structured in a way that allows the child ongoing access to the funds but also limits his or her “ownership” of them, therefore keeping them from becoming marital property. There are different means an estate planning lawyer can use to reach this goal, such as naming the child as a trustee or co-trustee. Trustees generally have control of the funds but not out-and-out ownership.
Additionally, a good Schaumburg estate planning lawyer may advise you to specify how the funds in the trust may be used, for example for educational purposes, although there are several reasonable ways to structure these requirements. One thing to avoid is a situation where the child receives regularly scheduled distributions, as that money could be considered marital property. Instead, the child should need to request funds from a trustee who is predisposed to provide them.
As with any area of Schaumburg estate planning law, the topic can be pretty complex, but knowing the right questions to ask of your lawyer can make a big difference in being on the right track.