What is Dynasty Planning and a Dynasty Trust?

KEY TAKEAWAYS

• Dynasty Planning is focused on maximizing the assets you pass on to future generations of your family and preserving the assets for your families use 2+ generations from now
• Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes or generation skipping transfer taxes, and are typically designed to last forever

Dynasty trusts help families build generational wealth and pass it down to future generations while minimizing transfer taxes between generations. Dynasty planning uses trusts 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 duration as they can last for forever. In this article, we’ll explain how dynasty trusts work, address the benefits and tradeoffs, and explain who should consider taking advantage of this critical strategy.

What Is A Dynasty Trust?

A dynasty trust, also called a perpetual trust, is a type of trust that is designed to pass wealth down over the generations in a tax-advantaged way. As long as the assets remain in the trust, the family that owns the trust can avoid gift tax, estate tax, and the generation-skipping transfer tax (which is ~40%!) — for an unlimited amount of time.

How Does A Dynasty Trust Work?

Setting up and operating a dynasty trust is actually fairly straightforward. A dynasty trust, like any trust, is simply a legal agreement. The person who establishes the trust and funds it with its first assets — the “grantor” — gets to decide the rules of the trust.

1. Establish the trust. The grantor establishes the trust’s rules and names a trustee. These rules can be strict or lax; for example, a relaxed approach might be to appoint a beneficiary as his or her own trustee and to give the trustee the power to distribute funds when needed for his or her own general wellbeing. A stricter approach might include appointing a professional like Valur as the trustee and requiring that the trustee distribute assets only on a set schedule or in specifically outlined circumstances.
2. Fund the trust. The grantor funds the trust with some initial assets. These assets will form the basis for the family’s long-term wealth, so a dynasty trust typically holds substantial assets at the outset or may also be funded with a Grantor Retained Annuity Trust (GRAT) over time to avoid estate taxes if gifting the assets would trigger the estate tax.
3. Distribute funds. The initial beneficiaries can receive distributions according to the rules laid out by the grantor, as implemented by the trustee, but they typically do not receive the majority of the assets as the distributions might trigger the gift tax. Instead they can make use of the assets owned by the trust (real estate, vehicles etc.) and limit distributions to cash when needed.
4. Pass to future generations. The initial beneficiaries will typically be the grantor’s children and/or grandchildren. After the last of those beneficiaries passes away, the next generation — the initial beneficiaries’ children and grandchildren — become beneficiaries. That transition happens again every time a generation of beneficiaries passes on. But, critically, the transfer happens free of gift, estate, and the Generation Skipping Transfer (GST) Tax because while the new generation becomes beneficiaries of the trust the assets are not distributed from the trust.

How Long Does A Dynasty Trust Last?

The length of a dynasty trust is the main feature that distinguishes a dynasty trust from any other irrevocable trust — a simple non-grantor trust, a Charitable Remainder Trust or any other form. Dynasty trusts can last forever or close to depending on the state. A dynasty trust can last up to 365 years in Nevada, 90 years in California or forever in South Dakota. (As you can see, the duration of time varies based on state law.)

Why is it important that dynasty trusts can last for a long time? Because of the tax advantages.

What are the Pros and Cons of Dynasty Trusts?

Tax advantaged. The main benefit of a dynasty trust is that it is tax advantaged, and those tax benefits can last forever. How does this work?

Assets transferred to a dynasty trust may be subject to gift, estate, and GST taxes when the transfer is made, if the assets exceed the federal and state exemptions. As of 2023, an individual can put up to $12.92 million into a dynasty trust for his or her children or grandchildren (and, in effect, their children and grandchildren) without incurring these taxes. And once these assets are in a dynasty trust, they are free of those same transfer taxes for future generations. The reason behind this is typically these future generations become beneficiaries of the dynasty trust and its assets, enabling them to utilize and receive trust assets but in most cases they do not have the assets transferred to them. If they receive distributions they may owe applicable taxes but otherwise they can avoid those taxes by keeping the assets in the trust.

How? The immediate beneficiaries of a dynasty trust are usually the children of the grantor. After the death of the last immediate beneficiary, 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 don’t leave the trust, they are not subject to transfer taxes that typically apply when assets are passed between generations. The money, in other words, can make its way down the family tree tax free as future generations get access to trust assets without those assets being transferred into future generations personal estate.

Distributions when needed. Another useful feature of dynasty trusts is that they may make distributions to beneficiaries. Indeed, a dynasty trust’s trustee has leeway and may distribute money from the trust to support beneficiaries, as outlined in the trust’s original language. But because the beneficiaries themselves don’t control when the money is distributed, they aren’t considered the true owners of the assets. As a result, the assets are protected from creditor claims.

Irrevocable. It’s important that you get the details right at the outset. These trusts last forever, and a dynasty trust is a type of irrevocable trust. The grantor has the freedom to decide how the money will be managed and distributed to beneficiaries. But once the trust is funded, neither the grantor nor any future beneficiary keeps control over the assets, and have a limited ability to amend the trust’s terms.

Who pays tax on dynasty trusts?

If dynasty trusts exists free of estate and generation skipping transfer taxes, surely somebody has to pay tax on the assets at some point, right? Yes, in a couple of ways.

First, as we explained earlier, a family will owe gift, estate, and GST taxes on the initial transfer of assets to a dynasty trust, to the extent that the transfer takes them beyond their federal and state estate tax exemption. Once the assets are in the trust, however, there will be no further transfer taxes unless assets are transferred out of the trust.

Second, the trust’s assets will still be subject to income tax like any individual but these trust can leverage tax exempt structures themselves like Charitable Remainder Trusts or tax advantaged investment opportunities like municipal bonds or solar investments.

Can you set up a dynasty trust?

30 states still have a law on the books called the Rule Against Perpetuities. This law says, essentially, that a trust can’t run for longer than 21 years after the life of the last direct beneficiary of the grantor. That rule, you can probably tell, is in direct conflict with the concept of a dynasty trust.

But 21 jurisdictions have eliminated the Rule Against Perpetuities and do allow dynasty trusts which means you can create a dynasty trust in those states.

• Alaska
• Delaware
• District of Columbia
• Hawaii
• Idaho
• Illinois
• Kentucky
• Maine
• Maryland
• Michigan
• Missouri
• Nebraska
• New Hampshire
• New Jersey
• North Carolina
• Ohio
• Pennsylvania
• Rhode Island
• South Dakota
• Virginia
• Wisconsin

Who should set up a dynasty trust?

Say you live in one of these 21 places. Should you and your family set up a dynasty trust? It depends on your goals and your level of wealth.

Significant assets. A dynasty trust is a good choice for families that want to transfer significant wealth from generation to generation. If you and your family have an estate that will put you over the estate tax exemption threshold, a dynasty trust could make sense.

Settled family situation. Even then, though, recall that dynasty trusts are irrevocable, so they may not be a good fit if your family’s needs may change, or if the family dynamics are unsettled to the point that you cannot write distribution rules that will work for the foreseeable (and unforeseeable) future.

Next Steps

Read more about trust in our article on the differences between revocable vs irrevocable trusts! Or contact our team and we’ll help you find out what’s best for your situation.

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.