Several years ago, the aged patriarch of a successful family-owned business passed away and left behind four adult children to take care of the family business. In one of the first board meetings, an important decision was being considered that purported to increase profitability but would adversely affect a large part of the company work force.
As the decision was being finalized, one of the daughters pulled out a statement of wishes and values document left by her father outlining his philosophy of running the business and the family. One of his basic beliefs was “always take care of the employees before taking care of the owners.” The decision was changed to follow this philosophy and several years later has sustained a positive impact on the business and the family.
Traditional estate planning is focused on the financial consequences of death. Effective estate planning can prevent or minimize a number of unpleasant consequences such as probate, litigation and estate taxes. This kind of estate plan typically ends at the immediate aftermath of passing.
Dynasty planning, on the other hand, looks further down the road and involves making long-term preparations for your family to have a positive relationship with money. It requires leadership and a value-based perspective. It involves giving your family powerful tools to protect wealth and to have a healthy relationship with money so it will be a blessing rather than a curse.
An essential component of dynasty planning is a vehicle that will last for multiple generations. This is most often a special irrevocable trust that has dynasty provisions built in so that it can stay in existence for an unlimited period of time. Parents typically set up this kind of trust to accomplish a multitude of important things. Properly structured and funded, it will shelter the family assets, business, real estate and life insurance proceeds from estate taxes that in the past have been as high as 55 percent and were recently reduced to 40 percent.
This year is a particularly good time to fund this kind of trust because it is typically accomplished through gifting. A couple can gift up to $10.5 million this year and pay no gift taxes. There have been seven major changes to the tax law in this area in the last 10 years, so making a plan now while the law is good would be wise.
Trustees in a dynasty trust are typically family members of succeeding generations who have discretionary power as it relates to the assets of the trust. Wise parents realize that since children and grandchildren will have discretionary power over the assets in the trust and if family goals and values are to be carried on, those children and grandchildren need to have clear direction. Consequently, many leave behind a statement of wishes or a statement of family values to give principled direction to succeeding generations on how to make decisions regarding not only the family business or assets, but also the family values and to provide incentives to encourage such values.
In the 1970s, my wife’s grandfather established a trust to fund a university literature contest that continues even today. A charitable component can be to establish funding for arts, education, the underprivileged, collegiate sports or church missions.
Recently a client sold a family business we nicknamed "The Candy Company.” Dynasty planning yielded a sweet reward. A charitable remainder unitrust (CRUT), an element of dynasty planning, was established for which he received a significant tax deduction. At the sale of the business, significant proceeds passed out of the taxable estate to a dynasty trust and the CRUT also received sales proceeds that were not taxed for income or estate taxes.
From these proceeds, he and his wife will receive a significant taxable payment each year to fund their retirement. The remainder, after both of them are gone, will fund a family donor advised charitable fund that their daughters will direct for charitable and social causes. Wealth, otherwise lost to taxes, will fund satisfying endeavors for generations.
The financial power of the dynasty trust was dramatically portrayed in a recent study. Consider $1 million gifted directly to a child, which grew at 6 percent with modest distributions. The money was passed to the child who subsequently passed it to the third generation, all with no planning. After estate taxes, the total value grew to $7.6 million.
The same $1 million gifted to a dynasty trust and kept in the dynasty trust under the same assumptions and for the same number of generations would grow to $83.8 million. The only difference was that the dynasty trust paid no estate tax on the money or its growth.
Not only is there financial clout in dynasty planning, but there is emotional, social and spiritual influence as families thoughtfully pass on the legacy of family wealth and values.
Rich Bloomfield, CPA, is an author, co-host of the business radio show “What About Wealth” and the managing member of Bloomfield CFO, PLLC, a CPA firm specializing in gift and estate planning and asset protection planning.