What is a Dynasty Trust?

Some wealthy individuals create enough wealth to provide for their children and grandchildren during their lifetimes.

A dynasty trust can help you create a legacy that stretches to your grandchildren and beyond.

A dynasty trust differs from other trusts because it provides for multiple generations, with an impact that reaches many years into the future.

Many folks are surprised to learn that most trusts are temporary and cannot be perpetual. The “Rule Against Perpetuities” rule of law terminates most trusts after a few generations.

This limitation may be avoided by using a Dynasty Trust because it is considered a perpetual trust and can last forever.

Families with significant wealth use Dynasty Trusts in their overall estate plan.

Dynasty Trusts are getting new attention from wealthy Americans because of the changes in estate tax rules created under President Trump.

The estate, gift, and GST exclusion amount for individuals are $12.92 million, meaning that a couple can give away $25.84 million tax-free in 2023.

At the same time, the maximum tax rate for estate, gifts, and GST remains at 40 percent.

But, these higher lifetime exemption limits are only guaranteed to last until the end of 2025, dropping to approximately $6.2 million.

This gives ultra-rich families a potentially limited trust planning opportunity to control how wealth is passed from generation to generation.

How does a dynasty trust work?

Estate and gift taxes are levied every time assets change from generation to generation.

Dynasty trusts avoid these taxes by creating a second estate that will outlive most family members and continue providing for future generations.

An adequately established dynasty trust will not subject your descendants to estate taxes during the life of the trust.

The only time when the estate or gift taxes may become due is at the point when assets are transferred into the dynasty trust. However, if you follow the allowable limits, any taxes may not be due at the transfer time.

The grantor’s children are usually the recommended beneficiaries of a dynasty trust. After the last child dies, the grandchildren or great-grandchildren become the beneficiaries.

So, if your goal is to transfer wealth to grandchildren or great-grandchildren, a dynasty trust can make that easier.

The dynasty trust, like any trust, has a trustee that controls it. The trustee can use trust income or principal to benefit the beneficiaries.

• The dynasty trust allows responsible beneficiaries total control and access to their trust assets.
• Specific provisions restricting their access to trust income or principal can be added into the trust for beneficiaries who are not as financially responsible.

By limiting beneficiaries’ access, such “spendthrift clauses” can also prevent creditors of a beneficiary from raiding trust assets for indebtedness or prevent the divorcing spouse of a beneficiary from laying a claim to trust assets.

An experienced estate planning attorney should properly draft spendthrift clauses and dynasty trusts.

An attorney, who is familiar with the grantor’s estate, can also create discretionary clauses. Discretionary distributions can be conditioned on beneficiaries’ ability to support themselves independently.

The trust can be created during a grantor’s lifetime, or a portion of the grantor’s estate can be used to fund the dynasty trust at death.

While alive, creating a dynasty trust allows the grantor to leverage their $12.92 million generations skipping transfer tax exemption.

The dynasty trust will shelter the value of the assets transferred inside the trust and any appreciation of those assets.

How long can a dynasty trust last?

Dynasty trusts are long-term trusts explicitly created for descendants of all generations.

Before many states began to eliminate the Rule Against Perpetuities, Dynasty trusts could survive 21 years beyond the death of the last beneficiary alive when the trust was written.

Yet, many states are doing away with this rule and only recognize trusts with expiration dates.

For instance, a dynasty trust can last up to 365 years in Nevada, while California allows only 90 years.

So, which states allow perpetual dynasty trusts?

Some states, like Delaware, Nevada, Tennessee, and South Dakota, permit trusts to last forever.

So, wealthy people from across the United States can open dynasty trusts in these states with the help of a qualified estate planning attorney.

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