Dynasty Trust

A Dynasty Trust is an irrevocable trust designed to pass wealth from generation to generation, without incurring estate and gift taxes or Generation-Skipping Transfer Taxes (GSTT). The defining characteristic of a Dynasty Trust is its term.

Unlike most irrevocable trusts that must terminate after a few generations, a Dynasty Trust can last for hundreds of years in some states. This makes a Dynasty Trust an indispensable means of estate planning for families with a considerable amount of wealth to preserve.

How a Dynasty Trust Works

Traditionally, the “Rule Against Perpetuities” limited the life of a trust to 21 years after the last beneficiary who was alive when the trust was created has passed away. Now, however, many states have either modified or done away with this rule entirely. Among these, the best states to create a Dynasty Trust are South Dakota, Nevada, Tennessee, and Alaska, in that order.

Today, you can design a Dynasty Trust that will last for many many generations. Whats more, the Dynasty Trust can be structured to provide its beneficiaries with a great deal of control over the trust assets, or virtually no control at all.

In some cases, you can structure a Dynasty Trust so that its beneficiary is also its sole Trustee. But, the more control a beneficiary has over the trust assets, the less protection the trust offers against that beneficiary’s creditors.

You may also create a Dynasty Trust that severely restricts the control future generations will have over your family’s wealth, and appoint a financial institution or corporate Trustee to ensure that they do not abuse or squander the trust assets. You can even establish a council of family members that will have input into how the trust, containing your family’s wealth, is administered.

Advantages of a Dynasty Trust

Besides its duration and flexibility, another huge advantage of a Dynasty Trust is the many tax savings it offers. A properly structured Dynasty Trust will, in certain cases, enable you to completely eliminate or defer local and state income taxes. What's more, the assets that you transfer to the Dynasty Trust and their appreciated value can also be permanently eliminated from your taxable estate, saving you even more in taxes.

Yet another significant advantage of a Dynasty Trust is that, since the assets are owned by the trust and not the beneficiary, a beneficiary's creditors usually can't reach the trust assets to satisfy the beneficiary's debts. So long as the assets stay inside the trust, and its beneficiaries have no direct control over them, it will be extremely difficult for any creditor to access those assets.

Funding a Dynasty Trust

To fund your Dynasty Trust, you can either transfer assets into it during your lifetime, or have assets transferred into it upon your death. That said, there are a couple of important things to keep in mind when funding a Dynasty Trust:

  1. Taxes - as it is with any irrevocable trust, gift taxes may be incurred when transferring assets into the trust if the value of those assets is greater than the gift tax exemption. You may also incur GSTT when gifting to a Dynasty Trust. Furthermore, you will still have to pay income taxes on the assets held in the trust. So, when funding your Dynasty Trust, it is important that you discuss these issues with an experienced tax professional.
  2. Irrevocability – because a Dynasty Trust is an irrevocable trust, once you fund it with an asset, you will cease to have any control over that asset, and your ability to remove that asset from the trust or modify the terms of the trust will be severely restricted. It would, therefore, be a good idea to consult with an experienced estate planning attorney for guidance on what assets you should and shouldn't place into your Dynasty Trust.

Is a Dynasty Trust Right for Your Family?

If you have a significant amount of wealth and want to 1) save your estate a great deal of money on gift and transfer taxes, 2) dictate how and when future generations will receive distributions of wealth from your estate long after your death, and 3) protect your family's wealth from being lost to threats such as creditors, lawsuits, and divorce, then a Dynasty Trust may be ideal for you and your family.

On the other hand, if you are concerned about the lack of control you will have over the trust assets during your lifetime, or want to provide your beneficiaries with a great deal more flexibility with respect to making use of the trust assets, then a different type of living trust may make more sense for you.

Consult with an Experienced Estate Planning Attorney

Because a Dynasty Trust must be properly structured to get around the Rule Against Perpetuities, and because trust taxation is so complex, you must enlist the assistance of a qualified attorney when drafting your Dynasty Trust. To learn more about Dynasty Trusts or for assistance with determining if a Dynasty Trust makes good sense for you, contact us to arrange a free consultation with an experienced estate planning attorney.