Dynasty trusts can enable families to make multigenerational -wealth transfers with relative ease. Families have long used trusts to transfer wealth to heirs. And before the introduction of the generation-skipping transfer tax in 1986, many families could effectively pass assets to their grandchildren or greatgrandchildren without limitations or paying a hefty share to Uncle Sam. While the 1986 decision capped the amount of funds one could transfer without triggering a GST tax, the use of a dynasty trust is still an effective means to sheltering wealth from estate taxes for multiple generations.

"Dynasty trusts can be a great tool for someone with a large estate who wishes to pass that wealth down through multiple generations without incurring taxes each time it passes to the next generation. It can also be useful for parents with moderate estates who have children with large taxable estates," says Maggie Carlson, Vice President and Senior Product Consultant with Personal Trust Services for Wachovia Securities in Richmond, Virginia.

Carlson says under those terms a dynasty trust is much more favorable than those provided by a traditional trust, whose benefits are mostly limited to the succeeding generation. Indeed, avoiding estate and generation-skipping taxes could mean a substantial savings. In 2007, assets exceeding the current $2 million per-person unified credit incur estate taxes of up to 45% in federal estate taxes. Without being sheltered within a dynasty trust, that tax bite would occur again each time the assets are passed to another generation.

Dynasty trusts can be set up as revocable trusts (i.e., they can be changed or terminated prior to the grantor's death). However, they are commonly created during life as an irrevocable trust or they are funded at the death of the grantor through a will or a trust document.

If the grantor has an asset that is expected to appreciate significantly in coming years, he or she could gift it to the irrevocable trust and have its current value applied against the $1 million lifetime gift credit," Carlson says. "So if the asset -- a closely-held business, perhaps -- eventually appreciated lo $10 million, that extra $9 million would not matter for tax purposes because the asset technically would no longer be a part of the grantor's taxable estate. This same synopsis in a dynasty trust would allow thai appreciation to pass through multiple generations sheltered from estate taxes.

RETAINING DISCRETION

Some clients might worry that establishing a dynasty trust could mean relinquishing control over the distribution of their wealth for generations to come. But Carlson says that is why discretionary language is so important. The trust provisions in the document can direct trustees to dispense money to beneficiaries, who may not even have been born at the time of the trust's creation. Clearly, the inability of a grantor to know or anticipate how a beneficiary might use the funds -- even as long as 100 or more years after their death -- makes such discretionary language imperative.

PROTECTION FROM CREDITORS

Another key benefit of a dynasty trust is the ironclad creditor protection it can provide, both now and in the future. "The beauty of a dynasty trust is that it can double as a spendthrift trust," says Carlson. "Some states have stronger protection provisions than others, Delaware being one of the best for a dvnastv trust with spendthrift provisions."

"Let's say that the grantor's great-grandson has a failed marriage that ends in divorce," she says. "The assets in a dynasty trust cannot be part of the divorce settlement -- or paid out to any creditor -- because the great-grandson technically never owns the assets. They were always considered to be part of the trust itself. So not only are you avoiding estate taxes and generation-skipping taxes, you also are protecting your money from creditors for decades down the road."

PROFESSIONAL ASSISTANCE

However, Carlson cautions that rules regarding dynasty trusts vary by state and must conform to complex IRS guidelines as well. "Some states impose strict limitations on how long a trust can remain in effect after the death of the grantor, while others have less restrictive rules against perpetuity," she says.

Creators of the trust document also have to make sure that the discretionary language -- the terms under which money can be dispensed -- passes the IRS codes, Carlson adds. "If the discretionary language is too general or too broad, the IRS could deem it as giving the grantor or beneficiary too much control over those funds," she says.

"In that case, they would attach the assets to the estate, which would defeat the purpose of the dynasty trust," says Carlson. "Drawing up a trust document is a very specialized task that should only be done by an estate-planning attorney knowledgeable in IRS and state regulations regarding dynasty trusts."

Together, with legal and tax advisors, we can discuss:

• Whether a dynasty trust could help you avoid estate and generation-skipping taxes.
• How to create a dynasty trust that conforms to state and IRS guidelines.
• Other estate-planning issues that could help minimize the tax impact on your loved ones.

Wachovia Securities is not a legal or tax advisor. However, our Financial Advisors will be glad to work with you, your accountant, tax advisor and/or attorney to help you meet your financial goals.

This communication is not a covered opinion as defined by Circular 230 and is not intended or written to be used, and cannot be used, or relied on, by the taxpayer, for the purpose of avoiding federal tax penalties. This communication was written to support the promotion or marketing transactions) or matter(s) addressed in the written communication; and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Trust services are offered through Wachovia Bank National Association, a national banking association (chartered by the Office of the Comptroller of the Currency) and a wholly owned subsidiary of Wachovia Corporation.

Wachovia Securities is the trade name used by two separate, registered broker-dealers and nonbank affiliates of Wachovia Corporation providing certain retail securities brokerage services: Wachovia Securities, LLC Member, NYSE/SIFC, and Wachovia Securities Financial Network, LLC (WSFN), Member FINRA/SIPC Provided by courtesy of Jeff Kernodle, a Senior Financial Advisor with Wachovia Securities Financial Network in Searcy. For more information, please call Jeff at 501-279-0101. Wachovia Securities Financial Network, LLC, member FINRA and SIPC, is a registered broker-dealer and separate nonbank affiliate of Wachovia Corporation. © 2008 Wachovia Securities Financial Network, LLC.

Jeff Kernodle may be reached at Wachovia Financial Services at 2112 W. Beebe-Capps or by calling 268-2561.