Gift and Estate Tax Considerations

The gift tax system applies to transfers to Dynasty Trusts. Therefore, when considering the lifetime funding of a Dynasty Trust, consider limiting lifetime transfers to the amounts covered under the lifetime credit against gift tax and the annual exclusion amount ($13,000 per participant, per year in 2010). Any gift taxes paid on the transfer of assets to a Dynasty Trust are deducted from the client’s estate, reducing the estate (and thus the taxes paid) at the client’s death. Also consider the generation-skipping transfer tax (“GST tax”) when creating a Dynasty Trust. The GST tax is a tax on lifetime and testamentary transfers to persons more than one generation below the transferor, at the highest marginal estate tax rate. If a client applies his or her lifetime GST exemption to transfer assets to a Dynasty Trust, the income and principal that accumulate inside the trust may be distributed free of the GST tax for the duration of the trust.