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Dynasty Planning

KEY TAKEAWAYS

  • Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes, and are typically designed to last forever
  • Dynasty trusts are irrevocable and their terms cannot be changed once funded.

What is a Dynasty Trust?

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes—such as the gift tax, estate tax, or generation skipping transfer taxes (GSTT)—for as long as assets remain in the trust.

A dynasty trust’s defining characteristic is its durations as they can last for forever.

How a Dynasty Trust Works

The immediate beneficiaries of a dynasty trust are usually the children of the trust grantor (the person whose assets are used to create the trust). After the death of the last child, the grantor’s grandchildren or great-grandchildren generally become the beneficiaries (and this process continues for as long as the trust runs) and can utilize the trusts assets. Critically since the assets aren’t passed outside of the trust or gifted between generations they are able to avoid transfer taxes such as the estate or generation skipping taxes (GSTT) that occur as assets are passed between generations

A dynasty trust is a type of irrevocable trust. 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 does not have any control over the assets or permitted to amend the trust’s terms. The same is true for the trust’s future beneficiaries.

Assets that are transferred to a dynasty trust can be subject to gift, estate, and GSTT taxes only when the transfer is made and only if the assets exceed tax exemptions. Under current law, an individual can put up to $12.06 million in a dynasty trust for his or her children or grandchildren (and, in effect, their children and grandchildren) without incurring these taxes. Moreover, the assets that go into a dynasty trust, as well as any appreciation on those assets, are permanently removed from the grantor’s taxable estate, providing another layer of tax relief.

A trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms. But because beneficiaries lack control over the trust’s assets, it will not count toward their taxable estates. Similarly, the trust’s assets are protected from claims by a beneficiary’s creditors because the assets belong to the trust, not to the beneficiary.

However, income tax will still apply to a dynasty trust. To minimize the income tax burden, individuals often transfer assets to dynasty trusts that don’t produce taxable income, such as non-dividend paying stocks and tax-free municipal bonds.