Insights

Secure Your Legacy: Dynasty Trusts

04.19.24

There are many types of trusts to consider when creating an estate plan and creating a legacy. One that provides the unique ability to pass wealth from one generation to the next while minimizing taxation is called a dynasty trust. While “dynasty” may sound like the domain of ultra wealthy clients, the reality is many families can benefit from dynasty trusts – even those without large estates.

What are Dynasty Trusts?

A dynasty trust is a type of irrevocable trust. Unlike traditional trusts, which typically have a limited lifespan, dynasty trusts can continue for hundreds of years. Additionally, they can be a valuable tool for those who want to minimize their tax burden and ensure that their wealth is passed down to their heirs without incurring gift or estate taxes.

Dynasty Trust Benefits

Trust Administration

One of the key benefits of a dynasty trust is the continuation of trust administration for multiple generations. This means that the assets held in the trust can be managed and distributed by a trustee for the benefit of future beneficiaries. It allows for the preservation and growth of assets over time. This also provides a level of protection for beneficiaries who may not have the financial knowledge or experience to manage a large inheritance on their own.

Tax Benefits

Dynasty trusts also offer significant tax benefits. By placing assets in a dynasty trust, the assets are removed from the grantor’s estate, reducing the potential for estate taxes. Additionally, the assets in the trust can grow and be distributed to beneficiaries without incurring gift or estate taxes. The grantor of the trust may contribute an amount up to the current gift tax limit without having to pay any taxes. Afterwards, the only taxes on the assets of the trust may be income taxes which can be avoided through certain investments, and most importantly, the beneficiaries will not have to pay any taxes.

This can be beneficial to high-net-worth individuals who want to minimize their tax burden and transfer wealth to future generations, while taking advantage of generation skipping tax (GST) strategies.

Creditor Protection

Another benefit of dynasty trusts is that they offer creditor protection for beneficiaries. Assets in dynasty trusts are not owned by the beneficiaries – which means they are shielded from creditors and potential lawsuits and can continue to grow and benefit future generations. This can be particularly important for beneficiaries who may be in high-risk professions or who have a history of financial instability.

How to Set Up a Dynasty Trust

Choosing a Trustee

One of the most important decisions when setting up a dynasty trust is choosing a trustee. The trustee is responsible for managing the assets in the trust and making distributions to beneficiaries according to the terms of the trust document.

It is important to choose a trustee who is trustworthy, financially responsible, and has the necessary knowledge and experience to manage the assets in the trust. Many people choose a professional trustee, such as a bank or trust company, to ensure that the trust is managed properly.

Funding the Trust

Once the trust document is created and a trustee is chosen, assets can be transferred into the trust. This can include cash, stocks, real estate, and other valuable assets. It is important to work with a financial advisor or estate planning attorney to determine the best assets to transfer into the trust and ensure that the transfer is done properly.

Dynasty Trusts in Action

Dynasty Irrevocable Trust Example

Mr. Smith creates a spousal lifetime access trust with dynasty trust provisions for the benefit of his wife and children. Mr. Smith makes a $5,000,000 gift to the trust and allocates his lifetime gift and GST tax credits for this amount on his gift tax return ($13.61 million gift tax exemption limit in 2024). The gift doubles to $10,000,000 in 10 years by yielding a 7% return annually (see Rule of 72 discussed in link above).

Assuming the current exemption amounts, the assets held in this trust are exempt from estate and GST taxation. The appreciation of those assets also escapes estate and GST taxation during his wife’s lifetime, and for so long as those assets are held in trust for his children and future grandchildren for generations to come, while also providing substantial asset protection to the surviving spouse and children for their lifetimes.

Dynasty Revocable Living Trust Example

Mr. Smith creates a revocable living trust with dynasty trust provisions for the benefit of his wife and children. At his death, Mr. Smith’s estate is worth $5,000,000.

Assuming the current estate and GST tax exemptions, the entire amount will be exempt from estate and GST taxation. The appreciation of those assets also escapes estate and GST taxation in the same manner as described above, while also providing substantial asset protection to the surviving spouse and children for their lifetimes.

Takeaways

Dynasty trusts offer unique benefits and advantages that traditional trusts do not. They allow for trust administration to continue for multiple generations, offer significant generation skipping tax (GST) benefits and provide creditor protection for beneficiaries.

Pro Tip: Dynasty trusts are not available in every state due to the rule against perpetuities, a common law principle that restricts the duration of controlled property interests, including those established within trusts. 

If you are considering estate and inheritance planning to preserve and transfer your wealth to future generations, a dynasty trust may be a valuable addition to your strategy. Reach out to an MAI advisor who can work with you and your estate planning attorney to determine if a dynasty trust is right for you.

Estate-Planning-Call-To-Action

Information updated as of March 26, 2024. This is for educational purposes only.  The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

We look forward to learning about your financial goals.

CONTACT