Any California divorce attorney will tell you that when individuals inherit money, it can easily become ‘commingled’ or mixed with their community property. This can occur if both spouses' names appear on the accounts, or even when assets are placed in a revocable trust that is in both names. It is extremely unromantic to prepare and have both spouses sign a pre- or post-nuptial agreement allowing your child to secure inherited assets. If a child’s inheritance is left in this trust, it will be segregated and will likely survive a divorce. In fact, giving assets to a dynasty trust might also give a child a viable excuse to not mix the trust asserts with a spouse. If mom and dad set it up in the dynasty trust, then it can remain that way. This can alleviate the pressure placed on a child by an emotionally immature spouse to intermingle or mix their assets after marriage. Protection from Litigation: Everyone is susceptible to being sued – a car accident with claims exceeding insurance coverage, a slip-and-fall on your property, a failed business transaction, etc. When gifting assets directly to a child, they are titled in the child’s name. If the child loses a lawsuit, all of that money could be lost.Assets given in a dynasty trust enjoy a very high level of asset protection. To access assets in the dynasty trust, a plaintiff must first win the lawsuit and then file a separate court action against trust distributions. Legal fees and the trust's structure become real obstacles. The dynasty trust erects a significant barrier between the collection and the child’s inherited funds. When designing a dynasty trust, we often limit the purposes for distribution to a beneficiary. We deviate from the common practice where a trustee is instructed to provide for a beneficiary’s health, education, maintenance and support. Certain California court cases have confirmed that payments for healthcare and maintenance are more prone to lawsuits, so we avoid them in certain circumstances. Estate Tax Protection: The dynasty trust is designed to apply the generationskipping transfer tax to assets passing into the trust. This tax exemption allows assets passing through the dynasty trust to be passed to a child’s children (the grantor’s grandchildren) without paying estate taxes at the child’s death. For example, $2 million left to a child and invested well could be worth $16 million or even more when the child dies. Estate taxes would give a big chunk of it to the government. Leaving that $2 million to a child in a dynasty trust instead likely prevents the $16 million that is in that trust from being subject to estate taxes when the child dies. In many situations it can pass in total to the grandchildren. How do the laws governing dynasty trusts vary from state to state? What are the key regulations in your own jurisdiction? Each state has different probate and trust laws. California’s laws do not allow asset protection trusts or dynasty trusts to be created to protect your own assets. Another person, like a parent, uncle, or even a family friend can create a dynasty trust for a child. But a child cannot create one for themselves. Also, California allows a beneficiary to be the sole trustee of a dynasty trust at a certain age. Many other states require a co-trustee because of certain trust laws and practices. 26 LAWYER MONTHLY JULY 2023 The laws governing marital property are also different in many states. Most of the US follows a separate property standard, where each spouse owns his or her own earnings. California and six or seven other states follow a different theory – absent an agreement to the contrary, a spouse’s earnings are shared with the ‘community’, meaning owned 50% by the other spouse. A dynasty trust will provide the same protection against loss in a divorce in every state but provide more powerful protections in the community property states, as the laws tend to favour sharing assets between spouses. Additionally, the laws regarding executing a judgment against a dynasty trust are different in each state. California tends to be more permissive towards collecting assets from a trust. Certain other states allow many trusts to resist most types of creditor intrusions. What is the process involved in setting up a dynasty trust? A dynasty trust is created by a contract signed by the settlor, just like any other trust document. The settlor must have a clear understanding of the nature of the trust and the reasonable consequences Assets given in a dynasty trust enjoy a very high level of asset protection.
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