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Dynasty trusts and federal estate taxes

You may already know that Arizona does not have a state-level estate tax, setting it apart from other states that sometimes level some fairly heavy taxes on people when they pass away.

However, that doesn’t mean you shouldn’t think about estate taxes at all. For larger estates, there is a chance of owing federal estate taxes, which can still be a burden to your heirs. This is especially problematic if you hope that significant wealth will trickle down through the generations.

One way to potentially get around some of this is to use a dynasty trust. When you pass away, your money goes into the trust instead of directly to your heirs. It will face federal estate taxes at this time.

However, a dynasty trust lasts for generations. It can pay out to your grandchildren and other heirs. It does not have to get taxed again.

If you left it directly to your children, it would be taxed when it went to them. When they passed away and left it to their children, it would get taxed again. With the dynasty trust, you can avoid these future taxes and therefore preserve more of the estate for your family.

This type of trust is not right for everyone, as the size of the estate matters and you must want to leave money to multiple generations. But it is a powerful tool to use when it fits your situation, and it also shows you why it is so important to consider all of the options at your disposal when doing your estate planning.

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