What is a Dynasty Trust?

With a properly executed estate plan, your wealth can be enjoyed by your children and even their children. But did you know that by using a dynasty trust, you can extend the estate tax saving benefits for several generations, and perhaps indefinitely?

A dynasty trust can build a bridge that protects your wealth from gift, estate and generation-skipping transfer (GST) taxes and helps you leave a lasting legacy. And, with today’s higher lifetime gift and GST tax exemptions, a dynasty trust is all the more powerful.

Dynasty Trust in Action

Transfers that skip a generation — such as gifts or bequests to grandchildren or other individuals two or more generations below you, as well as certain trust distributions — are generally considered to be GSTs and subject to the GST tax (on top of any applicable gift or estate tax). However, you can make gifts up to the GST exemption amount free of GST tax.

The exemption in 2018 rose to $11.18 million (up from $5.49 million in 2017). So you may want to use as much of your exemption as you can afford to this year and next. Applying it to a dynasty trust can help you make the most of your exemption.

Your contributions to a dynasty trust will be considered taxable gifts, but you can minimize or avoid gift taxes by applying your lifetime gift tax exemption — also $11.18 million through 2018 (up from $5.49 million in 2017).

After you fund the trust, the assets can grow and compound indefinitely. The trust should be designed to make distributions to your children, grandchildren and future descendants according to criteria you establish. So long as your beneficiaries don’t gain control over the trust, the undistributed assets will bypass their taxable estates.

Enhancing the Benefits

To increase the benefit to future generations, you can structure the trust as a grantor trust so that you pay any taxes on the trust’s income. The assets will then be free to grow without being eroded by taxes (at least during your lifetime).

Also consider further leveraging your GST tax exemption by funding the dynasty trust with life insurance policies or property that’s expected to appreciate significantly in value. So long as your exemption covers the value of your contributions, any future growth will be sheltered from GST tax, as well as gift and estate tax.

Allowing a trust to grow for several generations can produce enormous amounts of wealth. For example, a trust funded with an initial contribution of $5 million and earning an average annual return of 6% will be worth more than $92 million in 50 years and almost $1.7 billion in 100 years (assuming no income taxes or distributions).

Three Planning Scenarios

Even though the long-term tax-saving benefits may be substantial, you may question the reasons to include distant descendants as beneficiaries. Here are three scenarios to consider:

1. If your estate plan already provides for your immediate family with resources to spare, a dynasty trust can be a nice supplement to your plan.

2. You may be reluctant to turn your children into “trust fund babies” by allowing them to live off their inheritances. You can design a dynasty trust to ensure that your children, grandchildren and future generations pursue their own careers while at the same time providing them a safety net in the event they’re unable to pay for health insurance, medical care, education, housing or other necessities.

3. A dynasty trust can be a great tool for encouraging charitable giving. For example, you might provide for the trust to make matching distributions to beneficiaries equal to a percentage of the charitable contributions they make each year.

Whatever your reasons for including a dynasty trust in your estate plan, it’s important to communicate your intentions to your present and future beneficiaries.

Considering State Law

If you think a dynasty trust might help you achieve your estate planning goals, talk to your adviser about the state law considerations. Some states apply the rule against perpetuities, which limits a trust’s life span, generally to no more than 100 years or so. But many states have extended the limit to several hundred or even 1,000 years or have no rule against perpetuities.

You don’t have to live in a perpetual trust state to take advantage of this technique; it can be just a matter of specifying the applicable state law in the trust agreement. But additional requirements may include appointing at least one trustee who resides in the state whose laws govern the trust — a bank or other corporate trustee, for example — and locating at least some of the trust assets in that state.

Laws vary from state to state, so choose carefully. Typically, the most attractive states are those that both allow perpetual trusts and have no state income tax.

Is a Dynasty Trust Right for You?

If establishing a lasting legacy is an estate planning goal, a dynasty trust may be the right vehicle for you. However, before you take action, consult your estate planning adviser, because a dynasty trust can be complicated to set up.

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Big Tax Changes in 2018

Big tax changes have gone into effect in 2018. Thanks to the massive new tax cut that Republican lawmakers enacted late last year. I thought it would be good to highlight some of the key changes. Remember, changes are always opportunities. It is a chance to provide information to our clients and ask questions to see what type of help they really need. Here are some of the key changes:

  • Individual taxes  Standard deductions nearly doubled to $24,000 for couples, $12,000 for singles and $18,000 for household heads. Given these higher amounts, it is a sure bet that fewer people will itemize.
  • Home Mortgages are nicked Interest can be deducted on up to $750,000 of a new acquisition on a primary and secondary residence, down from $1 million. The new limit generally applies to mortgage debt incurred after December 14, 2017. Older loans still get the $1 million cap. No write off is allowed after 2017 for interest on home equity loans for which the proceeds are used to buy a car, pay down credit card debt etc.
  • The Medical Expense deduction is enhanced – Lawmakers chose to keep this popular write-off but they’ve also lowered the threshold AGI on Schedule A from 10% to 7.5%.
  • The Child Tax Credit is doubled to $2,000 for each dependent under age 17.
  • Estate Tax and gift tax exemptions have changed. Congress has doubled the lifetime estate tax exemption to $11,180,000. The rate remains at 40%. The annual gift tax exclusion for 2018 is $15,000 per donee.
  • The new tax law dramatically reforms the taxation of businesses of all sizes. Regular Corporations (C Corps) will pay a flat 21% rate, down from the 35% top rate now. This lower rate is permanent and begins in 2018

There is so much more to know about the ever-changing tax environment. But with change comes an opportunity to serve. Take the time to familiarize yourself with the changes and reach out to your clients with the information they need. You will be glad you did.

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The Cost of Care Calculator

Have You Tried the Cost of Care Calculator?
It’s important for clients to understand the cost of LTC services in order to understand why an LTC Rider is such a valuable feature on a life insurance policy. Mutual of Omaha’s new calculator provides this information. Learn more.
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6 Reasons to Convert Term Insurance

Despite the fact that many financial advisors consider permanent life insurance to be a more important long-term planning tool than term life insurance, many consumers still opt to purchase term life policies.

Term life insurance is often sold at a lower price compared to permanent life insurance products. Other times, a consumer sees a term life insurance policy as one way to satisfy an immediate coverage need. Some of the common expenditures that consumers may envision the pay out from a term life insurance policy covering include:

  • Funerary expenses
  • Medical expenses
  • Consumer debt
  • College or graduate school tuition

Devotees of the media personality Dave Ramsey may also hold term life policies as one pillar of the author and talk show host’s personal finance plan, which includes advising consumers to buy term life policies because they’re cheaper than whole life policies, then use the difference to invest in the stock market.

However, only about 2 percent of term life insurance policies actually pay out, according to Forbes Magazine.

Converting a term life insurance policy to a permanent life insurance policy should always be a back-pocket option for most consumers. Advisors who talk with clients about this option will gain the benefit of that person’s trust in addition to the potential for fresh business, given that the original policy does indeed include a conversion clause.

It also behooves financial professionals to seek clarity with clients whenever those consumers seem ‘fuzzy’ about the conversation requirements of their term life insurance policies – including any relevant conversion deadlines.


Since buying a new whole life policy will be more costly than the investor’s old term life policy, the first thing that an investor should understand is the lasting value of permanent life insurance.

Read on for six reasons why consumers with term life insurance policies should consider converting those policies, despite the higher premiums associated with whole life products.

  • They’re likely to outlive their term life insurance.

No one is happy with an investment that results in zero gains. The No. 1 reason that consumers who seem very likely to live beyond the term of their standard life insurance policies should look into conversion options is, if they don’t, they risk losing their premiums once that policy has expired.

  • They are rethinking their estate.

Term life insurance policies are generally not seen as effective for estate-planning. Whole life insurance policies, on the other hand, carry more value and security.

Also, wealthy consumers who are concerned about estate taxes that may be incurred by beneficiaries after they die may consider whole life insurance policies because of the payout of those policies can be used for just such an expense.

  • They may simply prefer an upgrade.

Term life insurance policies are often sold to young families with competing financial priorities such as paying down debt or socking away money in a college fund. These customers might have preferred the long-term security of a whole life insurance policy, but simply couldn’t afford it and instead decided to buy a term life policy.

As these consumers become more financially secure, and they are more willing to pay higher life insurance premiums for increased financial security and peace of mind.

  • They anticipate steep family costs.

Consumers who anticipate that their families will face major financial hurdles after they are gone, such as the expense of caring for a developmentally disabled adult, may want to turn to a whole life insurance policy in order to ensure that those beneficiaries are adequately covered.

  • They are restructuring their retirement income.

Consumers who can see retirement on the horizon and want to ensure sufficient income throughout old age may want to consider how a whole life insurance policy, the principal of which is tax exempt, can serve as a savings tool. Investing in one can equate to a certain amount of tax-free retirement income down the road.

Some consumers may even want to consider investing in a tax-sheltered permanent life insurance policy now with the anticipation of cashing it out later for retirement income.

  • Their financial priorities are changing.

Since the chances are high that individual investors were younger and healthier when they purchased their term life insurance policies. Some of those people may have subsequently developed very serious illnesses that could prevent them from qualifying to purchase permanent life insurance policies in the future. People in this boat may want to convert a term life insurance policy in order to forgo the anticipated medical exam that would be required to purchase a completely new whole life insurance policy.

ISN Network (800) 338-1892

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Insight From Roccy

I am a fan of Roccy  DeFrancesco, JD. I particularly like when he goes deep on helping advisors understand the complexities in Life Insurance products. This is a good insurance lesson from one of the better teachers out there.


From Roccy-
Since we are doing education on IULs in a webinar series, I thought I’d do some general life insurance education on a topic that is not widely known or understood.
                In fact, I’ve always been amazed at how few advisors know what CVAT or GPT means in the context of designing cash value life insurance policies for clients. So, I thought I’d do a newsletter on both.
What are CVAT and GPT, and why are they important?
                CVAT is the abbreviation for Cash Value Accumulation Test, and GPT is the abbreviation for Guideline Premium Test. These terms refer to the two basic alternatives for determining whether a product meets the requirements to qualify as a life insurance contract (not whether a policy is a modified endowment contract or not).
                Both tests define the relationship between cash value and the death benefit that is required at all times for a contract to qualify as life insurance but, as you will see later, they do it using two different approaches.
                What happens if a product fails to meet one of these two tests?
                The product is then no longer taxed as a life insurance contract. Instead, the growth on cash is taxed annually as an investment.
                Most life insurance software defaults to running a GPT. So, without a majority of advisors knowing it, they have been running GPT-tested cash value insurance illustrations for clients.
                The real question is: Why run an illustration using CVAT?
                The non-technical answer is because you can pay larger premiums into the policy quicker with a lower initial death benefit and a higher cash surrender value
                If that’s the case, why are we not running all of our illustrations using CVAT?
                Again, giving a non-technical answer, the reason is that when you get into the borrowing phase of the contract, even though CVAT starts with a lower death benefit (which you would think would accumulate more money in the policy quicker), a policy tested using GPT will almost always allow the client to borrow more money from the policy in retirement.
Example illustrating why CVAT shouldn’t be used most of the time

                Let’s look at a 45-year male old who pays a $50,000 a year in premium until age 64 and then borrows from the policy at age 65.
Initial Death Benefit
1st Year CSV
CSV at age 65
Because the initial death benefit is lower and the cash value is higher, you’d think the CVAT policy would yield more of an ability to remove cash from the policy, but that’s not the case.
Loans from the policy every year from ages 65-100
While it makes little sense, GPTing allowed the client to remove more money from the policy from ages 65-100 even though the CSV (Cash Surrender Value) just prior to borrowing was higher with CVATing.  The required death benefit with CVATing rises much quicker in the borrowing phase vs. GPTing. This is why GPTing almost always allows a client to borrow money from a policy vs. CVATing.
When do I see the CVAT used? 
                CVAT is used routinely in whole life policies (yet another reason I don’t like WL).
Unfortunately, I also see it used quite a bit in the college funding arena. Why, unfortunately because agents and insurance companies use CVAT testing to prop up the cash value in the policy in the early years to make it look better than it really is (and there are a number of short fund situations where clients want to shove a lot of cash in quickly).
                As I’ve stated a number of times over the years, cash value life does NOT work for the vast majority of clients when trying to save/pay for college. If you would like to read my 10-page summary on why cash value life doesn’t work for college planning, click on the following link:
When “should” you use the CVAT?
            Potentially in a premium finance situation where you need high cash value in the policy to help with collateral.
            Otherwise, you should use GPTing (especially if the goal is borrowing from the policy).
            While you may not use CVAT too often, or even never, if you are in the financial services field and certainly if you sell cash value life insurance, you should know your trade and, therefore, you need to know the difference between CVAT and GPT and when to use one over the other.

Roccy DeFrancesco, JD
Benton Harbor, MI 49022

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Lets Talk Savings in Retirement

Last week I had a face-to-face with one of my long time clients. She was recently laid off from her job of 30+ years and is earnestly looking at the idea of not returning to work and retiring early. She asked me for some real world ideas on how to live more frugally and to make her retirement dollars last longer. I thought that would be a good chance for me to share with you some of the strategies we discussed:

  1.  Maximize Social Security-  One of the most powerful ways to maximize lifetime income is to collect the largest check possible from Social Security. Benefits rise with inflation, and it provides a survivors benefit for married couples, which is important when savings are limited. It is never good to assume that the best time is as soon as you are eligible, so be sure to meet with an expert on the options before you make your election
  2.  Reduce the Tax Burden- Minimizing taxes can help when every dollar matters.If there is a period in your retirement where you expect to be in a lower tax bracket, it could make sense to convert dollars from your traditional IRA into a Roth. Roth withdrawals won’t count towards your tax bill and this could also help lower any potential tax implications on your social security.
  3. Buy an Annuity – Giving money to an insurer in exchange for a guaranteed income can really help retirees cover the basics. The payout rates on an income annuity can be higher than bonds because it provides a source of return that investments cannot.
  4. Look at a Reverse Mortgage – Reverse mortgages, most of which are backed by the Federal Government, let people over the age of 62 with substantial home equity access that equity- it does not have to be paid back until the borrower dies or moves out of the house. One approach is a “standby” reverse mortgage where a borrower can open a line of credit to be tapped when necessary. Reverse mortgages have a one time upfront fee and some other charges but for retirees who have little capital but lots of “house” equity- this can be a good plan.
  5. Policy Analysis and Review –  If you own a life insurance policy now is a very good time to have it reviewed. Mortality costs have gone down over time so a thorough review is imperative. It you are healthy it may be possible to get the same insurance for less money, more insurance for the same money or even to have a “paid-up” policy.
  6. Live on Less- This is the hardest part. But when we are working we tend to buy before we think since income is not a problem. Once we are on a fixed income we need to change our habits. Sometimes we have to stop ourselves and say – do we really need this or can I do without it?
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Four Words

That is right. Four words. Experts say that just four words can change your practice and help you gain the trust and confidence of your clients. Those four words…

“What do you think?”

By asking one question – “what do you think?” – you let people know that you value their input, respect their opinion and have an open mind toward solving problems. Clients know that you are knowledgable, but asking for their input helps form a valuable bond that leads to a more satisfying relationship.

What do you think?

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