Estate taxes may be due upon the deaths of parents, when assets are transferred to the children or grandchildren. Assets are usually transferred outright, and a check is made payable to the beneficiary or assets are titled in the beneficiary's name. The beneficiary can do whatever he or she wants with the inheritance.
However, there may be an issue if you transfer assets outright. You may be exposing those assets to a second generation of estate taxes, and if you try to transfer assets directly to your grandchildren, they may be faced with a third set of taxes called generation-skipping transfer tax (GSTT). However, if you own a Family Limited Partnership (FLP) or Limited Liability Company (LLC), these assets offer tremendous gifting and wealth transfer opportunities. You don’t have to relinquish control—you just must want to provide for your family in the future and protect them.
A dynasty trust is created to transfer wealth from generation to generation without being subject to the gift, estate, or GSTT taxes, for as long as the assets remain in the trust (subject to applicable state laws). This trust can also protect the assets from creditors, divorcing spouses and other issues.
A dynasty trust is created in most cases by the parents and can include almost any type of asset, such as life insurance, securities, or a limited partnership interests (but not qualified retirement plans). The assets are held within the trust, and when the grantor (parents) die, the trust can automatically subdivide into as many new trusts as you’ve named beneficiaries in the trust. This is called a bloodline trust. As a result, if the parents have three children, the trust divides into three new trusts, dividing the assets equally among the three children. When each child dies, the trust subdivides again for their children (the original parents’ grandchildren) in their respective trusts, and again the assets are divided into equal shares.
These trusts provide broad powers for health, welfare, maintenance and support. Therefore, the children can use the money as they see fit. The trust is protected, and all assets and the growth of the assets in the trust will avoid estate taxes when structured correctly. You can use this trust to protect and provide for your children, their children and your great-grandchildren. See an experienced estate planning attorney about drafting this type of trust.
Reference: Kiplinger (Oct. 2, 2021) “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust”