Apr 1, 2007 12:00 PM, By Daniel L. Daniels and David T. Leibell, partners, Cummings & Lockwood LLC, Stamford, Conn.

By: By Daniel L. Daniels and David T. Leibell, partners, Cummings & Lockwood LLC, Stamford, Conn.

A dynasty trust can offer significant benefits, but achieving these benefits is not simple. Crafting a well-constructed dynasty trust requires the planner to clear hurdles presented by various provisions of tax and trust law, including not only the federal estate and gift tax, but also the generation-skipping transfer (GST) tax, state fiduciary income tax and non-tax principles, including the common law surrounding creditors' rights to reach trust assets and the rule against perpetuities.

Dynasty trusts, designed to last in perpetuity, offer benefits to a settlor's family for many generations. If structured properly, income and appreciation on assets transferred to the trust can be removed from the estate and gift tax system forever. But there are other benefits: The trust can be designed so that the settlor pays all income tax associated with the trust during the settlor's lifetime, in effect allowing the trust to grow income tax-free. And, in some cases, it may be possible to design the trust such that it does not pay state income tax. In addition, the trust can be designed so that the trust assets are shielded from the claims of the beneficiaries' creditors and the claims of a beneficiary's divorcing spouse.

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