The article below was originally written for the wealthy, but now with our new concept of “Financial Immortality”, almost everyone could benefit from this great piece of information!

Many families would like to pass their wealth down to their children. In turn, their hope is that their children will be successful and can pass wealth down to the next generation, and so on. Unfortunately, along the way, each transfer between generations gives the federal and state tax authorities the opportunity to levy and collect Estate and Gift Taxes, diminishing what’s actually left.

How can you maximize your family’s financial legacy? Many of the country’s wealthiest families often use a method for transferring wealth that permits the accumulation and distribution of assets to multiple generations with the least amount of taxes. This involves the use of “Dynasty Trusts.” These trusts enable affluent families to benefit multiple generations with a single transfer of property, and to make distributions to descendants for their needs.

At one time in our country’s history, there was no limit to the amount of property that could be left in trust for the benefit of multiple generations of family members. Ultra-affluent families used trusts to avoid the transfer taxes that would otherwise apply when property was transferred down successive generations. Many of the great family fortunes were passed down intact, over long periods of time, in this manner.

But in 1986, Congress created the “Generation-Skipping Transfer Tax” (GST tax). The GST tax took away the ability to pass unlimited wealth to successive generations without tax consequences. The GST tax was designed to protect against the avoidance of gift and estate taxes when property was transferred, either outright or in trust, and either during life or at death, to individuals more than one generation below that of the transferor (for example, a grandparent gifting directly to a grandchild, bypassing the child). The GST tax is complicated in its application and expensive when assessed—currently at a 35 percent tax rate. Although current laws provide an exemption for the GST tax of $5 million in 2012, careful planning must be made to ensure transfers fall within the exemption. Dynasty Trusts are designed to take advantage of this exemption.

Dynasty Trusts are even more efficient and impactful when they’re funded with highly appreciating assets or life insurance. Since it’s difficult to predict if assets will continue to appreciate over a long period of time, life insurance is often a better funding vehicle. The reason for this is the leverage that a life insurance death benefit has relative to the premiums that need to be paid. The death benefit is often a significant multiple over the total premiums paid, but it’s the premiums paid that would count toward the GST tax exemption.

The other complicating factor to the use of Dynasty Trusts is that, historically, states have had laws that limited the lifespan of trusts. These laws were called “Rules Against Perpetuities,” and they effectively limited trusts to a term of 90 to 120 years, after which the trust would have to terminate and distribute the balance of principal and income to the remaining beneficiaries.