Dynasty trusts, sometimes called perpetual trusts, are a form of irrevocable trust designed to preserve family wealth across multiple generations while minimizing transfer taxes and safeguarding against creditors. They are typically established in states that have abolished or relaxed the “Rule Against Perpetuities,” referring to a common law rule that prohibited trusts from lasting indefinitely.

Assets placed within a dynasty trust may incur initial transfer taxes but may be strategically chosen to remain within estate, gift, and generation-skipping tax exemption limits. Beneficiaries often have access to trust assets but do not receive them outright.

Benefits of Dynasty Trusts

• Multigenerational Wealth Preservation: Dynasty trusts allow families to hold assets within the trust for multiple generations, ensuring that assets remain within the family and are passed down to descendants, minimizing the risk of wealth depletion due to taxes or mismanagement.
• Potential Tax Efficiency: These trusts can leverage the generation-skipping transfer tax (GSTT) exemption, which allows assets to pass from one generation to the next without incurring additional taxes. This can lead to significant tax savings over time.
• Spendthrift Safeguards and Creditor Protection: Dynasty trusts typically include spendthrift provisions to prevent future creditors, including former spouses, from directly accessing trust assets.

Important Considerations for Dynasty Trusts

• Compressed Income Tax Brackets for Non-Grantor Trusts: Dynasty trusts may carry a significant income tax burden, which may sometimes make it preferable to fund them with assets that do not generate income, such as real estate, tax-exempt bonds, or growth stocks.
• Varied State Regulations: Each state has different requirements, so seeking the advice of skilled counsel is crucial.

Comparison of Alaska, Nevada and Delaware Dynasty Trust Rules

Alaska, Nevada, and Delaware have all abolished the common law “Rule Against Perpetuities,” which provides the ability to minimize transfer taxes by creating a trust that can continue for many generations. Using perpetual trusts can significantly increase wealth passing from generation to generation by avoiding unnecessary estate, gift and generation-skipping transfer (GST) taxes.

It is essential to work with knowledgeable legal and financial professionals when setting up a dynasty trust, as the laws and regulations surrounding trusts can be complex and subject to change. Tailoring the trust to your family’s specific needs and circumstances is key to maximizing its benefits.

Note: The information provided here is for general educational and informational purposes only. It is not legal advice and should not be interpreted as such. For a thorough understanding of these topics relevant to your specific circumstances, we recommend consulting a qualified estate planning attorney. Peak Trust Company cannot provide legal advice; however, we can serve as an informational resource and provide referrals to highly skilled attorneys who can offer legal and tax guidance tailored to your specific needs.