When families think about passing wealth from one generation to the next, the conversation often centers on wills, living trusts, or gifts. However, for those who want to protect and preserve assets for multiple generations, perhaps even in perpetuity, a dynasty trust can be an effective and strategic estate planning tool.
A dynasty trust is a long-term, irrevocable trust designed to pass wealth from generation to generation without incurring estate, gift, or generation-skipping transfer (GST) taxes at each generational level. Unlike many other types of trusts that terminate after a specific number of years or upon a beneficiary reaching a certain age, a dynasty trust can continue for decades or, in some jurisdictions, indefinitely, so long as the trust is funded and managed according to its terms.
How a Dynasty Trust Works
A dynasty trust is typically established during the grantor’s lifetime and funded with assets expected to appreciate in value. Once the assets are transferred into the trust, they are removed from the grantor’s taxable estate. The trust itself becomes the legal owner, and the trustee manages the assets for the benefit of current and future beneficiaries according to the trust agreement.
The key tax advantage comes from the generation-skipping transfer tax exemption. The GST tax is a federal tax applied when wealth skips a generation; for example, from grandparent directly to grandchild. However, if the trust is structured correctly and the GST exemption is allocated, the trust can pass wealth to grandchildren, great-grandchildren, and beyond without incurring additional estate or GST taxes at each generational transfer.
When a Dynasty Trust Makes Sense: Common Scenarios
While dynasty trusts can be useful in many estate planning situations, they are especially valuable in certain circumstances. Here are a few scenarios where creating one might be advantageous:
- Families with Substantial and Growing Wealth
For individuals or families with significant assets—often $10 million or more—federal estate taxes can take a substantial toll when wealth is transferred at each generation. A dynasty trust can be drafted to help lock in today’s estate and GST tax exemptions, ensuring that the assets continue to grow outside the taxable estate.
Example:
A business owner sells her company for $25 million and wants the proceeds to benefit her children, grandchildren, and future descendants. By placing $12 million into a dynasty trust and using her lifetime gift and GST exemptions, she helps ensure that those assets (and their future growth) can pass to heirs for decades without further estate or GST tax.
- Families Concerned About Asset Protection
Even if estate taxes are not a primary concern, protecting assets from potential threats such as creditors, lawsuits, or divorce can be a priority. Assets held in a dynasty trust are not considered part of a beneficiary’s personal assets, making them harder for third parties to access.
Example:
A couple has two adult children, one of whom is a physician and is at higher risk for malpractice claims. By establishing a dynasty trust for each child, the couple ensures that the assets remain protected regardless of any future legal challenges.
- Legacy and Value Preservation
Some families want to ensure that wealth is preserved but also used in a way that reflects the family’s values. A dynasty trust can include provisions for education funding, charitable giving, or support for specific causes over multiple generations.
Example:
A philanthropist funds a dynasty trust with $5 million and specifies that each generation may request funds for higher education expenses and that a portion of the annual income be donated to a designated charity. This structure ensures the family’s values continue alongside its wealth.
- Taking Advantage of Current Tax Laws
With federal estate and GST tax exemptions currently at historically high levels (set at $12.92 million per individual in 2023, though scheduled to be reduced in 2026), many high-net-worth individuals are choosing to establish dynasty trusts now to “lock in” the exemptions before they potentially decrease.
Example:
A real estate investor transfers highly appreciating property into a dynasty trust today, using the current exemption limits. Even if the exemption is reduced in the future, the trust can continue to grow outside the taxable estate.
Dynasty Trust Friendly States - Alaska and Nevada
Alaska and Nevada have abolished the common law “Rule Against Perpetuities” that prohibited trusts from lasting indefinitely. Using a dynasty trust can increase generational wealth by avoiding unnecessary estate, gift, and generation-skipping transfer (GST) taxes.
Alaska:
Alaska dynasty trusts can last forever; however, if a beneficiary exercises a special power of appointment, the trust is limited to 1000 years.
Nevada:
The state statutes permit Nevada dynasty trusts to last up to 365 years.
Considerations Before Establishing a Dynasty Trust
While dynasty trusts offer significant benefits, they are not for everyone. The irrevocable nature of the trust means the grantor cannot take assets back once transferred. Additionally, state laws vary regarding how long a trust can last—some states have abolished the “rule against perpetuities,” allowing trusts to last indefinitely, while others impose limits.
Working with experienced estate planning attorneys, tax advisors, and financial professionals is essential. These professionals can help tailor the trust to your goals, select a suitable jurisdiction, and ensure the trust is administered properly for generations to come.
Final Thoughts
A dynasty trust is a powerful tool for those who want to preserve wealth, protect assets, and create a lasting legacy. Whether the goal is to shield assets from taxes, provide for multiple generations, or maintain family values over time, this type of trust offers unique advantages that few other estate planning strategies can match. For families with significant wealth or a desire to leave a lasting imprint, a dynasty trust can be a cornerstone of a well-crafted, long-term estate plan.
If you want to learn more about whether a dynasty trust is right for you, contact a trust officer at Peak Trust Company today!