The Wyoming Dynasty Trust Gonnella & Majors, PC

The Wyoming Dynasty TrustGonnella & Majors, PC Gonnella & Majors, PC

What is a Dynasty Trust? • A trust which utilizes the trustmaker’s transfer tax exemptions to pass assets held in the trust to more than one generation of the trustmaker’s descendants. • Those assets then avoid being exposed to additional probate proceedings or subject to successive layers of estate taxes at the death of each generational level. Gonnella & Majors, PC

Federal Transfer Taxes • Federal Transfer Taxes are a tax on the transfer of assets from a donor to his or her beneficiaries. • Individuals presently have a $1,000,000 estate and gift tax exemption. • Married couples presently have a $2,000,000 estate and gift tax exemption. Gonnella & Majors, PC

Federal GSTT Taxes • Federal Generation Skipping Transfer Taxes (GSTT) are a tax on the transfer of assets from a donor to donees who are more than one generation removed from the donor; i.e. grandparents to grandkids. • Individuals presently have a $1,060,000 GSTT exemption. • Married couples presently have a $2,120,000 GSTT exemption. Gonnella & Majors, PC

Federal Estate, Gift and GSTT Taxes • Under the Economic Growth and Taxpayer Relief and Reconciliation Act (EGTRRA) of 2001, the maximum federal estate and gift tax and federal GSTT rates, sometimes collectively referred to as the “Federal Transfer Taxes”, are as follows over the coming years: Gonnella & Majors, PC

Calculation of Skip Taxes • Donor Gifts $10,000,000 to trust for benefit of the donor’s grandchildren: • Estate/Gift Taxes in year 2003 @ 49% • Total Transfer Taxes = $10,000,000 x .49 = $4,900,000 • Amount Passing After Transfer Taxes = $5,100,000 Gonnella & Majors, PC

Calculation of Skip Taxes • Donor Gifts $10,000,000 to trust for benefit of the donor’s grandchildren: • Estate/Gift Taxes in year 2003 @ 49% • Total Transfer Taxes = $10,000,000 x .49 = $4,900,000 • Amount Passing After Transfer Taxes = $5,100,000 • GSTT Taxes in year 2003 @ 49% • GSTT Taxes = $5,100,000 x .49 = $2,499,000 • Net Amount After Transfer & GSTT Taxes = $2,601,000 Gonnella & Majors, PC

Calculation of Skip Taxes • Donor Gifts $10,000,000 to trust for benefit of the donor’s grandchildren: • Estate/Gift Taxes in year 2003 @ 49% • Total Transfer Taxes = $10,000,000 x .49 = $4,900,000 • Amount Passing After Transfer Taxes = $5,100,000 • GSTT Taxes in year 2003 @ 49% • GSTT Taxes = $5,100,000 x .49 = $2,499,000 • Net Amount After Transfer & GSTT Taxes = $2,601,000 • Total Taxes Paid = $7,399,000 Gonnella & Majors, PC

EGTRRA Sunset • Through the Byrd Rule, Congress has to affirmatively vote to allow the repeal of estate taxes in 2010, or EGTRRA will go away. • If the repeal is not affirmed we fall back to the rules in effect January 1 of 2001, and if the deficit continues possibly something more draconian. • This means that it is time to get our estates in order and maximize the use of the planning tools presently available. Gonnella & Majors, PC

State Death Tax Dilemma • As a result of EGTRRA things get even more complicated: • Many of the states are losing out on the state credit traditionally given to them under the Federal Death Tax System. • To date, approximately 15 states have adopted their own death tax system. • It is anticipated that many others will follow suit as a result of the widespread state deficits existing today. • This means that in addition to the Federal Death Taxes, assets passing through your estate could also be exposed to state death taxes as well. Gonnella & Majors, PC

The Rule Against Perpetuities • The Rule Against Perpetuities (RAP) is a throwback to old English law, and is designed to ensure that wealth physically passes hands at death, instead of being held in trust indefinitely. • The conventional RAP requires all trusts to terminate within 21 years after the death of the last living beneficiary who was alive at the time the trust was created. • In essence the RAP is a law requiring the redistribution of wealth, which also subjects that wealth to successive layers of estate taxes at the death of each generational level. Gonnella & Majors, PC

Estate Taxes and the RAP • The RAP historically prohibited all trusts from lasting longer than approximately 100 years. • Therefore, any assets passing through a family for many generations would be subject to estate taxes roughly every 100 years. Gonnella & Majors, PC

Wyoming’s Answer to the RAP • Following extensive lobbying efforts on the part of the Wyoming Estate Planning Advisory Council, the Wyoming State Legislature modified the conventional RAP effective July 1 of 2003. • Wyoming law now allows for a trust to last for a period of up to 1000 years. • This means that assets held in a trust, and to which the trustmaker’s GSTT exemption has been allocated, can avoid successive layers of Federal and/or State Death Taxes for a period of up to 1000 years. Gonnella & Majors, PC

Conventional RAP & Estate Taxes • Assume $3 million worth of assets held over 200 years in a conventional RAP trust, and assume that the assets appreciate annually at 5%, annual 4% distributions are made, and the combined Federal and Oklahoma State Death Taxes are 50% every 100 years: Gonnella & Majors, PC

Wyoming’s RAP & Estate Taxes • Assume $3 million worth of assets held over 200 years in a Wyoming Dynasty Trust, and assume that the assets appreciate annually at 5%, annual 4% distributions are made, and the combined Federal and Oklahoma State Death Taxes are 50% every 100 years: Gonnella & Majors, PC

Wyoming’s RAP –vs- Conventional RAP • Head to head comparison of $3 million worth of assets held over 200 years in a conventional RAP trust versus a Wyoming Dynasty Trust, with the assets appreciating annually at 5%, annual 4% distributions being made, and the combined Federal and Oklahoma State Death Taxes are 50% every 100 years: Gonnella & Majors, PC

Wyoming Uniform Trust Code • Contemporaneously with the Wyoming Estate Planning Advisory Council’s efforts to have the Wyoming State Legislature adopt the 1000 year RAP, WEPAC also had the Legislature adopt the Wyoming Uniform Trust Code. • The Uniform Trust Code: • Simplifies the creation of a Wyoming Dynasty Trust; • Defines the nexus requirements for creating a Wyoming Dynasty Trust; and • Provides mechanisms increasing the flexibility and long-term applicability of a Wyoming Dynasty Trust. Gonnella & Majors, PC

Spendthrift Protections • In a perfect world, inherited assets would never be subject to the claims of your descendant’s creditors. • However, if your descendants receive their inheritance outright, those inherited assets could be subject to the claims of their creditors as well as a spouse in divorce proceedings. • Wyoming Statute Section 4-10-502 prohibits a beneficiary from assigning their interests in a trust to a creditor or spouse in divorce proceedings. • This means that not only will the Wyoming Dynasty Trust avoid successive layers of generational Death Taxes, but the Wyoming Dynasty Trust can also offer significant protections to claims made against any of the beneficiaries of the trust. Gonnella & Majors, PC

Wyoming Dynasty Trust Funding • There are a myriad of different options for your funding of a Wyoming Dynasty Trust. • Due to the fact that you will need to allocate a portion, if not all, of your lifetime gifting exemption, together with a portion, and again maybe all, of your GSTT exemption, you must look carefully at which assets you want to place in the Wyoming Dynasty Trust. Gonnella & Majors, PC

Straight Funding of the Wyoming Dynasty Trust • Every US citizen presently possess a lifetime gift exclusion of $1 million dollars and a GSTT exemption of $1,060,000. • This means that single individuals can place up to $1 million worth of assets into a Wyoming Dynasty Trust without any transfer tax consequences. • Married couples can place up to $2 million worth of assets into a Wyoming Dynasty Trust without any transfer tax consequences. Gonnella & Majors, PC

Pros & Cons of Straight Funding • Pros • Very easy to structure. • Little risk of IRS gift tax return audit. Gonnella & Majors, PC

Pros & Cons of Straight Funding • Pros • Very easy to structure. • Little risk of IRS gift tax return audit. • Cons • Your transfer tax exemptions are used 100 cents on the dollar without any leveraging or discounting. Gonnella & Majors, PC

Funding the Wyoming Dynasty Trust With Life Insurance • Another very viable technique for funding the Wyoming Dynasty Trust is to have the trust hold a life insurance on the trustmaker’s life, or a second to die policy covering both the trustmaker and his or her spouse. • By making GSTT exemption qualified annual exclusion gifts to the Wyoming Dynasty Trust on behalf of the beneficiaries of the trust, the trust can then pay the premiums on that life insurance policy. • On the death of the trustmaker and/or his or her spouse, all of the proceeds of that policy are paid to the Wyoming Dynasty Trust, free from any Death Taxes. Gonnella & Majors, PC

Pros & Cons of Life Insurance • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. Gonnella & Majors, PC

Pros & Cons of Life Insurance • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. • Cons • Life insurance can be expensive. • Trust has very little value to the beneficiaries while you are alive. Gonnella & Majors, PC

Funding the Wyoming Dynasty Trust With Discounted Assets • Particular appreciating assets, such as a family business or real estate, can also be placed into the Wyoming Dynasty Trust. • By placing that particular asset into a family limited partnership or Wyoming Close LLC, the value of the asset can be reduced as a result of the lack of ownership interest marketability and lack of control held by members in the entity. • Those discounted ownership interests can then be sold or gifted to the Wyoming Dynasty Trust over time, maximizing the use of the trustmaker’s annual gifting exclusion, lifetime gifting exclusion and GSTT exemption. Gonnella & Majors, PC

Pros & Cons of Gifting Discounted Assets • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. • You can keep family run businesses and assets in the family. Gonnella & Majors, PC

Pros & Cons of Gifting Discounted Assets • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. • You can keep family run businesses and assets in the family. • Cons • Increased risk of IRS auditing discounts of interests gifted. • Requires more administrative work to structure. Gonnella & Majors, PC

Pros & Cons of Selling Discounted Assets • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. • You can keep family run businesses and assets in the family. • Likelihood of IRS audit is drastically minimized if sale terms are commercially reasonable. Gonnella & Majors, PC

Pros & Cons of Selling Discounted Assets • Pros • You maximize the use of your transfer tax exemptions by getting more assets into the trust than exemption actually used. • You can keep family run businesses and assets in the family. • Likelihood of IRS audit is drastically minimized if sale terms are commercially reasonable. • Cons • Requires more administrative work to structure. • Trust must hold cash assets capable of buying discounted assets over time. Gonnella & Majors, PC

Why Use Wyoming? • Wyoming is very tax friendly. Rated “Most Wealth Friendly State” by Bloomberg Magazine. Gonnella & Majors, PC

Income Tax Comparison Assume $500,000 of dividend is paid out to an Oklahoma resident or a Wyoming Dynasty Trust. What happens? Gonnella & Majors, PC

Why Use Wyoming? • Wyoming is very tax friendly. Rated “Most Wealth Friendly State” by Bloomberg Magazine. • Wyoming law permits a trust to last for a 1000 year term. Gonnella & Majors, PC

Why Use Wyoming? • Wyoming is very tax friendly. Rated “Most Wealth Friendly State” by Bloomberg Magazine. • Wyoming law permits a trust to last for a 1000 year term. • The Woming Uniform Trust Code creates known ground rules for the creation, modifiction and administration of a dynasty trust. Gonnella & Majors, PC

Why Use Wyoming? • Wyoming is very tax friendly. Rated “Most Wealth Friendly State” by Bloomberg Magazine. • Wyoming law permits a trust to last for a 1000 year term. • The Woming Uniform Trust Code creates known ground rules for the creation, modifiction and administration of a dynasty trust. • Wyoming has great accountants, financial planners, trustees and attorneys who can make your trust work over the long haul. Gonnella & Majors, PC

Why Use Wyoming? • Wyoming is very tax friendly. Rated “Most Wealth Friendly State” by Bloomberg Magazine. • Wyoming law permits a trust to last for a 1000 year term. • The Woming Uniform Trust Code creates known ground rules for the creation, modifiction and administration of a dynasty trust. • Wyoming has great accountants, financial planners, trustees and attorneys who can make your trust work over the long haul. • Wyoming is a known quantity, whereas many offshore jurisdictions are not. Gonnella & Majors, PC

Wyoming Dynasty Trust Design • There is no “one size fits all” Wyoming Dynasty Trust. • Each of you can customize the distribution provisions for you Wyoming Dynasty Trust from the most liberal to the most conservative of distribution schemes. • Each of you can use the Wyoming Dynasty Trust as a mechanism for instilling your values in the future beneficiaries of the Wyoming Dynasty Trust. • If desired, any one of you can build a charitable component into your Wyoming Dynasty Trust in order to pass on the importance of philanthropy to your descendants, as well as utilize federal charitable income tax deductions over the lifespan of the trust. Gonnella & Majors, PC

Wyoming Dynasty Trust Requirements • In order to form a Wyoming Dynasty Trust, you must satisfy the following nexus requirements: • The Trustee must be a resident of the State of Wyoming or have its principal place of business within the State of Wyoming; Gonnella & Majors, PC

Wyoming Dynasty Trust Requirements • In order to form a Wyoming Dynasty Trust, you must satisfy the following nexus requirements: • The Trustee must be a resident of the State of Wyoming or have its principal place of business within the State of Wyoming; • All or part of the trust administration must occur within the State of Wyoming; and Gonnella & Majors, PC

Wyoming Dynasty Trust Requirements • In order to form a Wyoming Dynasty Trust, you must satisfy the following nexus requirements: • The Trustee must be a resident of the State of Wyoming or have its principal place of business within the State of Wyoming; • All or part of the trust administration must occur within the State of Wyoming; and • The trust agreement must specify that the laws of the State of Wyoming govern the administration and interpretation of the trust. Gonnella & Majors, PC

The Wyoming Dynasty Trust Gonnella & Majors, PC