What Are Dynasty Trusts?

Tuesday, March 7, 2023

When creating an estate plan, many have their children, grandchildren, and other living heirs in mind when handing down money and property. However, some people want to leave behind a more enduring legacy. Dynasty trusts are a great option for those interested in multigenerational wealth transfers and could be the best method for your estate planning goals.

A dynasty trust is an irreversible trust that provides asset protection and tax minimization benefits similar to other types of trusts, but unlike a trust with complete distributions to your children or grandchildren, a dynasty trust can span more than two generations. For this reason, dynasty trusts are also often referred to as perpetual trusts and, theoretically, can last forever or as long as trust money and property endure. Dynasty trusts are complex because they are generally unable to be altered once they are created and they last for many years or lifetimes. Due to their complexity, they require intricate care when being set up, that is where the lawyers at Pavone Law estate planners can help.

Getting Started with a Dynasty Trust?

Dynasty trusts begin with the grantor who wishes to transfer their funds. The grantor transfers money and property into the trust to be passed on either during their lifetime or at the time of their death, in which case the trust is a testamentary dynasty trust. Regardless, as an irrevocable trust, once the dynasty trust is funded, it is set in stone. It cannot be revoked, and the rules the grantor sets for the trust can only be altered under certain state statutes governing trust modifications.

Selecting A Trustee for a Dynasty Trust

Selecting a trustee is perhaps the most crucial element in the decision making process for a grantor. It is not uncommon for the grantor of a dynasty trust to name an independent trustee, such as a bank or trust company, to serve as a trustee because they can administer the trust for as long as it lasts without relying on one sole person.

While it is possible to choose a beneficiary to serve as the trustee, this raises potential tax and creditor protection issues. A beneficiary-controlled trust can have income and estate tax consequences depending on the terms of the trust and the scope of the beneficiary’s powers. Not only does a beneficiary’s ability to control the trust affect the degree of asset protection the trust provides the beneficiary, but it also risks family wealth to misappropriation. In addition, a corporate trustee, like the dynasty trust, has an indefinite legal life, allowing for uninterrupted administration across generations. Corporate trustees typically charge an annual fee based on the amount of money and property in the trust.

Who Should Use a Dynasty Trust?

In most cases, trusts are not exclusively for the wealthy. However, dynasty trusts are generally an exception. While you do not need to have the dynastic aspirations of the Medici family or the House of Windsor to set up a dynasty trust, most of the time, it is used by families with significant wealth. While you do not need to have the dynastic aspirations of the Medici family or the House of Windsor to set up a dynasty trust, most of the time, it is used by families with significant wealth. There is no legal requirement that dynasty trusts be established with a specific sum of money. A dynasty trust, however, is only practicable if you own assets that will last for at least two generations (although this depends on the monetary needs of your beneficiaries and how fiscally responsible they are. Dynasty trusts are established by grantors who are concerned about many generations beyond their offspring. Contact Pavone Law Group if you feel this type of trust is in your trust planning.

Other than passing money down to future generations, another option to make use of a dynasty trust is to maintain a family business. The grim statistics about family businesses' lifespan are presumably well known to anyone who runs one (e.g., 40 percent transition to a second generation, 13 percent make it to a third generation, and just 3 percent survive to the fourth generation or beyond). The grantor can transfer shares of the company into a dynasty trust for the benefit of several generations of beneficiaries. The trustee might be a qualified trustee who can oversee business issues and guarantee business continuity while the beneficiaries profit financially from the enterprise. The grantor can insert clauses that help guarantee the company is operated correctly, such as mandating that the trustee have a board of directors-like advisory council. Please get in touch with us right away to start planning your dynasty trust.

Tax Benefits of a Dynasty Trust

Preventing taxes on your hard-earned money is a crucial part of maintaining your financial legacy within the family. In order to avoid gift and GST taxes on the money and assets handed directly to your grandkids, a dynasty trust can be funded with the federal estate tax exemption amount ($12.06 million per individual in 2022, or double that amount for couples). Certain assets are excluded from your taxable estate if you place them in a trust, timely file a gift tax return to allocate the relevant tax exemptions to the trust, or pay a portion of wealth transfer tax. This also applies to your beneficiaries, provided that the trust is completely excluded from GST tax.

Without increasing the beneficiary's taxable estate, trust assets may be utilized to cover living expenses or invested in real estate for the beneficiary. Even better, if you leave money and property to your loved ones in a properly formed dynasty trust, creditors and divorce courts cannot access them. If you give them money up front, neither you nor your beneficiaries will be entitled to these benefits.

Dynasty Trusts Not Available in Every State

The length of interests in controlled property, such as those in trusts, is constrained by the common law rule against perpetuities. The rule against perpetuities essentially prohibits persons from using legal instruments like deeds and trusts to control the ownership of property for many years after they have passed away, despite the fact that they were not intended to expressly apply to trusts. Yet, because the regulation is notoriously challenging to understand, many states have modified it to either lengthen the relevant term or eliminate it entirely. However, keep in mind that with the assistance of a knowledgeable estate planning attorney, you might be able to establish a trust in a state other than your own.

Creating Your Dynasty

If you think a dynasty trust might be right for you, the next step is to speak with an estate planning attorney at our firm. Among the items to be discussed are the selections of the trustee and beneficiaries, tax and creditor protection considerations, state laws on perpetual trusts, and how a dynasty trust fits into your overall estate plan. To start planning your legacy today, please contact us.

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