by Bruce Fenton

“Put not your trust in money, but put your money in trust,” advocated the late Oliver Wendell Holmes. Today, trusts play an important part for those wishing to preserve wealth for multiple generations, protect assets, and provide long-term solutions to care for those who are not able to manage their own affairs.

In the early 1900s, a handful of industrialists and entrepreneurs such as Rockefeller, Ford, and Carnegie had amassed tremendous fortunes. As these 20th Century entrepreneurs aged, preserving their estates from the ravages of estate and transfer taxes became a priority. They knew that when they died, and when their children died, the multi-generational estates would be heavily taxed.

Many of these successful families created separate trusts—legal entities designed to own property for future generations—with little or no future estate taxes. What they did, in the process, was create the dynasty or wealth preservation trust.

In today’s tax system, gift and estate taxes are levied every time assets change hands by gift or bequest at death. The dynasty trusts avoided those taxes by creating a second estate that can outlive most of the family members while providing for future generations. Unlike the more common revocable living trusts, these trusts are funded by making irrevocable gifts into the trust. This means that the person putting the property into trust—the trustor or grantor—gives up all rights to future benefits from trust assets.

By removing the grantor from any ownership interest, the trust accomplishes three important tasks. First, it removes the property from the estate of the grantor. Second, it removes the assets from the reach of creditors who might attempt to seize assets of either the grantor or the trust beneficiaries. Finally, the trust has a life that goes beyond that of the grantor.

The last two points make these trusts important planning tools for those grantors who wish to preserve wealth for trust beneficiaries who might not be able to manage their own affairs, such as a special needs trust for a disabled child or a family situation that could conceivably be the target of a future lawsuit.

In the last few years, states like Delaware and Alaska have adopted trust-friendly laws that make them attractive for trust creation and maintenance. Neither state imposes a state income tax on trust income. Both allow for trust life spans to continue in perpetuity and also allow “self-settled” trusts.

With self-settled trusts, the grantor or the settler of the trust can put property into a trust managed by an independent trustee who retains discretionary powers to pay out trust income to the settler. This allows an individual to place property into a trust and derive an income at the discretion of the trustee while shielding assets against “unknown future creditors.”

As a result of these trust-friendly laws, the trust business is big business in states like Delaware, where the DuPont family used trust laws to their advantage many years ago. A number of highly reputable trust companies operate within the state, helping those wishing to set up wealth preservation trusts or acting as independent trustees for existing trusts.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.