If you’re looking for a trust that can last forever, then you need a Dynasty Trust.
A Dynasty Trust lasts forever and still avoids estate taxes and protects your assets. It also enables you to protect your wealth for future generations and to pass along your family values. Although this is one of the more complicated trusts to create, it does allow you to maintain family control from beyond the grave for generations to come.
If this powerful estate planning tool sounds like something you need to preserve your wealth and legacy for decades to come, keep reading as we discuss Dynasty Trusts in more detail.
What is a Dynasty Trust?
Dynasty Trusts are a type of trust that will last for generations to come. The main purpose of Dynasty Trusts is to ensure assets and wealth are passed down properly while avoiding multiple types of taxes - such as gift tax, estate tax, and GSTT (generation-skipping transfer tax).
These types of trusts differ from other trusts in the length of time they last and the control they offer. Depending on the state where the generation-skipping trust is established, they can last for hundreds of years.
How a Dynasty Trust works
Dynasty Trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes. Since a Dynasty Trust is an irrevocable trust, it cannot be altered or changed and has no specified termination date.
Grantors can set strict (or lax) rules for how the money is to be managed and distributed to beneficiaries. But once the trust is funded, the grantor will not have any control over the assets or be permitted to amend the trust's terms. The same is true for the trust's future beneficiaries.
A Dynasty Trust provides for a beneficiary during their lifetime and upon the primary beneficiary’s death, the trust will be divided into multiple trusts - also known as subtrusts – one for each of the beneficiary’s children. Upon the death of a beneficiary’s child, the trust will continue to divide into sub trusts for the next generation, until it depletes.
Advantages of Dynasty Trusts
Dynasty Trusts have several unique benefits that make them a great option for wealthy individuals who want to leave their assets to multiple generations.
Benefits are broken down into two categories: tax benefits and family benefits.
Tax Benefits
As previously mentioned, Dynasty Trusts are established for the benefit of passing wealth down for generations to come without having to worry about taxes. However, there are exceptions to this rule and certain limitimation, therefore, it’s best to consult with an experienced estate planning attorney.
Generation Skipping Transfer Tax Exemption - The GST tax’s purpose is so the transferor cannot avoid transfer taxes by “skipping” a generation.
Avoid Double Estate Taxation - In a Dynasty Trust, assets are excluded from the estate tax calculations for your and future beneficiaries’ estates. The trust assets remain in the trust and not in your beneficiaries’ estates.
Family Benefits
Protection of Family Values - Dynasty trusts allow the grantor to direct how funds and assets will be released to future generations. This allows the creator to determine how much, and in what situations, that funds will be released.
Asset Management and Protection – Dynasty trusts provide a long-term way for managing assets for the benefit of your heirs. Because the trust is irrevocable it can be designed to protect beneficiaries from creditors.
Avoid Probate – Like most trusts, a Dynasty Trust can also eliminate the need for probate court.
Funding a Dynasty Trust
There are three ways to fund a Dynasty Trust:
- Gifts
- Loans
- Sales
You can fund Dynasty Trusts with gifts, but any gift to an irrevocable trust is susceptible to gift tax. One advantage of a Dynasty Trust is that you can transfer the amount of your remaining lifetime exemption from gift taxes to avoid the tax.
The gift can also be exempt from another type of tax, called the generation-skipping transfer tax. This is only valid if a donor’s exemption from GST tax is equal to or more than their gift tax exemption.
You, the grantor, may make loans to the Dynasty Trust to fund life insurance premiums or allow the trust to make investments. The IRS does require interest to be paid on these loans.
You can also fund a Dynasty Trust by selling assets to the trust in exchange for a promissory note. Appreciation on the assets sold to the trust more than the interest rate payable on the note helps dodge gift taxes.
Is a Dynasty Trust Right for Your Family?
As you’ve read, Dynasty Trusts are not for everyone. Although there isn’t a minimum dollar amount required to contribute to a Dynasty Trust, this type of trust is best for individuals with large, taxable estate.
It’s ideal for ultra-high net worth individuals with significant assets who want to manage their wealth across the generations. An example of someone who would benefit for a Dynasty Trust is someone who sold a profitable family-owned business or has a very large estate that they want to pass down for generations.
A Dynasty Trust does not make sense for anyone who doesn't need the trust to last for several decades. There are several less complicated types of trusts to choose from depending on your unique situation. Talk with an estate planning attorney to see if a Dynasty Trust makes sense for your unique situation.