The Tax Cuts and Jobs Act of 2017 essentially doubled the federal estate and gift tax exemption which, after inflationary increases, is $11.4 million per person and $22.8 million per married couple in 2019, and $11.58 million per person and $23.16 million per married couple in 2020. Therefore, very few people are subject to a federal estate tax. This exemption is increasing each year by an inflationary factor, but is scheduled to be cut back in half in 2026.
Because of the high federal estate and gift tax exemption, current Dynasty Trust planning is more focused on variables beyond simply saving estate tax. In fact, Dynasty Trusts are used not only for estate tax savings, but also for asset protection and income tax savings.
The Chart gives weights to important variables that planners weigh when deciding on the appropriate trust jurisdiction when situsing their Dynasty Trusts.
I. The Chart
The 8th Annual Dynasty Trust State Rankings Chart ranks the top 12 Dynasty Trust states. Although there are a handful of states that would be ranked relatively close to the 12th state, it is so unlikely that an estate planner would select a state that ranks outside of the first tiers of Dynasty Trust states that the Chart ends at 12.
The top four Dynasty Trust states, based on the factors in the Chart, are: 1. South Dakota (99.5 points), 2. Nevada (98.5 points), 3. Tennessee (95.5 points) and 4. Alaska (93.5 points).
II. The Underrated States
Alaska, Delaware, Nevada and South Dakota seem to get almost all of the press whenever Dynasty Trusts are mentioned. However, one of the objectives of the Chart is to show that there are other states that are worthy of mention among the greats.
In this author’s opinion, it is a shame that Tennessee doesn’t receive the publicity that it deserves. Unfortunately, the amount of marketing done by each state often skews the belief of the public.
III. Reasons to Use Dynasty Trusts
Historically, the avoidance of estate taxes was generally considered the most important reason to use Dynasty Trusts. However, with the federal estate tax exemption currently so high, so many families are no longer subject to the tax that there are other features that are more important for many of our clients.
Creditor and Divorce Protection. Creditor protection and divorce protection might be the most compelling reason to use Dynasty Trusts. Very simply, outright transfers are subject to the claims of the creditors and divorcing spouses of the recipients of the transferred assets. That is generally not true of transfers in Dynasty Trusts, provided said trusts are properly drafted and/or sitused in a protective jurisdiction.
Federal and State Income Tax Shifting. Income shifting is also very important. This is true both for federal income tax purposes and for state income tax purposes. An outright transfer to an individual causes all income earned by the transferred assets and capital gains incurred as a result of sales of those assets to be taxed at the individual’s federal and state income tax rates, whereas a well-drafted trust will allow the trustee to sprinkle the income to taxpayers in lower tax brackets.
State Income Tax Avoidance. Also, depending upon any state income tax long-arm statutes that may apply, there is often an opportunity to avoid incurring state income taxes by simply accumulating the income in a trust rather than distributing unwanted income to a beneficiary who resides in a state with a state income tax who doesn’t need or want the income. This opportunity was highlighted in the recent Kaestner decision which drew national attention. Suddenly, possibly as a result of that decision, state income tax avoidance using non-grantor trusts became one of the hottest areas of practice. This planning is further magnified by the $10,000 State & Local Tax Deduction limitations added via the 2017 Tax Act. The new inability to deduct state income taxes against federal income tax has substantially increased the tax savings for those who choose to do this planning.
Income Tax Basis Planning. Passing assets in trust rather than outright allows an independent trustee or trust protector to give a beneficiary a formula general power of appointment at death over assets with an income tax basis lower than fair market value, but not over assets with an income tax basis higher than fair market value. Compare this with the common situation where a Dynasty Trust isn’t used and instead the transfers are made outright so that all assets get a new income tax basis at the beneficiary’s death, including assets that will receive a step-down in income tax basis.
Avoidance of the Widow’s Election. If inherited assets are distributed outright to the beneficiary, then at the beneficiary’s death those assets are included in the Widow’s Election calculation for a decedent living in a common law jurisdiction, as opposed to a community property jurisdiction. For those beneficiaries who were trying to minimize their spouse’s inheritance, this can result in a very big difference in that the widow can take a percentage of these assets by electing to take against the will of the decedent.
IV. Conclusion
Dynasty Trusts are no longer primarily focused on estate tax savings. The Tax Cuts and Jobs Act of 2017 has changed much of the emphasis on federal estate tax planning.
The 8th Annual Dynasty Trust State Rankings Chart factors in the new era of Dynasty Trusts. This Chart is an easy-to-use summary of leading Dynasty Trust states that shows the material differences among the states and ranks them according to usability and flexibility. Planners often focus on the multi-generational estate tax benefits of a Dynasty Trust. However, this article describes a number of additional benefits that can be obtained with a Dynasty Trust, some of which often go unnoticed and are therefore undervalued by planners.
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him the Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018 and 2020. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com. His law firm’s website is www.oshins.com.
