Key Takeaways
- A dynasty trust is a type of irrevocable trust that is intended to protect assets for multiple generations and pass them down to family members with improved tax efficiency.
- The benefits of a dynasty trust include the ability to preserve assets for multiple generations of heirs, avoid generation-skipping taxes, and sustain generational wealth.
- A dynasty trust is different from a living trust as it is intended to last for multiple generations and sometimes indefinitely.
- Setting up a dynasty trust can be a complex process, so it’s a good idea to consult an attorney in order to maximize tax benefits and ensure the trust achieves your goals.
Introduction
In cases where an individual has considerable assets that they want to pass down to their family for generations to come, a standard living trust may not be sufficient for limiting the size of the taxable estate. In contrast, a typical living trust passes assets only to a grantor’s immediate beneficiaries, who are often the grantor’s next of kin.
A dynasty trust provides a method for transferring wealth across multiple generations with the goal of achieving tax efficiency. Tax rates on a standard trust can rise as high as 40% in some states for grantors who transfer assets to a beneficiary or heir—a dynasty trust may offer an opportunity to bypass these taxes.
States like California and Texas allow these trusts to be established for set timeframes under distinct legislation. Understanding what a dynasty trust is and the favorable terms they provide will allow you to choose the best possible tool for protecting your assets, maximizing the value of the assets your descendants receive, and preserving generational wealth.
What Is a Dynasty Trust?
A dynasty trust is a type of irrevocable trust that can be used to pass wealth from generation to generation while minimizing the incurring of federal transfer taxes like gift taxes, estate taxes, and generation-skipping transfer taxes. The person who initially creates the trust, who is known as the grantor, “trustor,” or “settlor,” can establish any rules about how the trustee should manage the property and distribute assets to current and future beneficiaries. However, a typical dynasty trust becomes irrevocable once it is funded, and the terms of the trust usually restrict the settlor’s ability to modify the trust.
What makes a dynasty trust different from other irrevocable trusts is its duration. Instead of simply passing assets to the settlor’s heirs, dynasty trusts are carefully structured to transfer wealth from generation to generation.
Key Features of Dynasty Trusts
The key features of dynasty trusts are related to their advantageous tax implications and the extended timeframe they provide for protecting assets compared to other estate planning tools. The current (2025) federal estate tax exemption for 2025 is $13.99 million, as outlined in the 2017 Tax Cuts and Jobs Act. That amount will increase to $15 million in 2026.
By leveraging this exemption, you can gift any amount to the trust below the current tax exemption amount without being subject to paying federal estate or gift taxes. These assets will then be exempt from transfer taxes at each level of distribution to heirs.
The other key feature of a dynasty trust is its timeframe. These trusts are unique in that assets can remain in the trust for multiple generations, avoiding the need for each new generation of beneficiaries to pay the high tax rates every time the assets are removed from the trust and placed into a new one. Exact time limits vary depending on state law, but some states can last hundreds of years.
Advantages of Dynasty Trusts
The features of a dynasty trust allow for several unique advantages compared to other trusts, centering around its unique tax benefits and potential financial savings. These advantages allow for the preservation of generational wealth across your lineage.
All together, the following are some of the key advantages:
- Tax Exemption and Minimization – A dynasty trust allows for the transfer of assets from generation to generation without those assets being subject to gift tax, estate tax, or generation-skipping transfer taxes as long as they remain in the trust.
- Asset Protection – These trusts separate any assets in the trust from the grantor’s taxable estate, which means that they cannot be targeted by creditors or divorce courts.
- Wealth Preservation Across Generations – By minimizing the tax liability of the estate and future beneficiaries, dynasty trusts can offer significant savings, preserving trust funds for beneficiaries across multiple generations.
While most trusts offer some level of tax benefit and asset protection, dynasty trusts are unique in their ability to do so across multiple generations to multiple groups of beneficiaries. As a result, they can offer considerable savings over time.
For example, when assets are transferred to children, grandchildren, and great-grandchildren, a transfer tax is normally levied at each stage. Your children will have to pay income taxes on the distributions they receive, as well as a transfer tax for inheriting the asset, substantially reducing the value of the assets they receive. With a dynasty trust, beneficiaries will still have to pay an income tax, but they avoid transfer taxes as a key benefit.
How to Establish a Dynasty Trust
Establishing a valid dynasty trust involves the following steps.
Setting Up the Trust
Setting up a dynasty trust is similar to any other trust. Like any other trust, a grantor must have mental capacity to create the trust. The grantor must be over the age of 18 and of sound mind, meaning they can understand the nature and consequences of their decisions. Begin the process by discussing your goals with an estate planning attorney to prepare for drafting the trust document.
In the trust document, you should identify your preferred beneficiaries, appoint a trustee, list assets to be included in the trust, and outline distribution terms for the assets. The final step will be to fund the trust by transferring the ownership of assets into the trust’s name. Once the trust has been established and funded, it will become irrevocable, meaning that you will be unable to change the terms of the trust unless the trustee and all beneficiaries agree.
Appointing Trustees
When appointing a trustee to oversee the trust, consider choosing a trustee who has experience with managing dynasty trusts. Some trustors decide to appoint a beneficiary or a family member to serve as a trustee. However, it’s often advisable to choose a professional trustee or trust company with a track record of establishing and administering these trusts. The length and complexity of these trusts may be better managed by a professional who has experience in managing and distributing assets for large estates with many beneficiaries.
Transferring Assets
Once you have created the trust, you should fund the trust with assets you wish to transfer to beneficiaries. You can choose to fund a trust all at once or make gifts to the trust over time. You may fund a dynasty trust with virtually any type of asset, including cash, investments, real estate property, business interests, and other valuable possessions, like artwork or collectibles.
To minimize future income taxes against one’s estate, many individuals prefer to fund their trust with assets that are expected to offer high-growth potential and produce significant income. However, for individuals more interested in minimizing the costs levied by the trust or future beneficiaries, they may choose to transfer cash or other tax-efficient assets that are less likely to accumulate income.
After assets are funded into the trust, they are considered to be owned by the trust, and not by the grantor or the family estate. It is essential that grantors understand that they lose control over these assets once they are transferred into the trust.
Ensuring Legal and Tax Compliance
A dynasty trust must follow the terms set by state law to guide how it should be established and how long it should last. For example, both California and Texas have rules against perpetuities, which means these trusts cannot last indefinitely. In California, a dynasty trust can last for as long as 90 years. In Texas, a dynasty trust can last a lot longer—up to 300 years.
Impact of State Laws on Trust Benefits
The benefits of a dynasty trust can vary depending on the state’s laws, with the two most significant factors being tax rates and time limitations. For example, states without income tax requirements may be more favorable to beneficiaries as they will not need to pay taxes on income received from the trust in the future. It’s important to consult an estate planning attorney and financial advisor in your state prior to establishing a dynasty trust so that you can understand the full financial and tax implications of using this estate planning tool.
California
In California, a dynasty trust can last for up to 90 years, as outlined in California Probate Code § 21205. California may impose taxes on income made from investments or property appreciation in a trust, which can reduce the size of an inheritance for beneficiaries. However, some states may also require an additional estate or inheritance tax in addition to federal estate taxes, while California does not require either.
Texas
Until recently, Texas residents who wanted to establish a dynasty trust had to do so in a different state. This is because the “Rule Against Perpetuities,” which limits how long trusts can exist after the death of the last potential beneficiary who is alive when the trust is created, used to be 21 years.
However, recent amendments to Texas Property Code section 112.036 now allow trusts to exist for up to 300 years after the trust becomes irrevocable. This extension applies only to Texas trusts that became irrevocable on or after September 1, 2021. This means that dynasty trusts can now be used in Texas. However, trusts in Texas cannot retain real property assets for more than 100 years.
Texas does levy an annual income tax on trust income, which may reduce the size of an inheritance for beneficiaries. However, Texas does not require an additional estate or inheritance tax.
Potential Drawbacks of Dynasty Trusts
Despite the unique benefits of dynasty trusts, there are a few possible drawbacks worth considering.
Initial Costs
The initial costs to set up a dynasty trust may be high compared to other trusts due to the complexity of these types of trusts. It can cost anywhere from $3,000 to $30,000.
These initial costs may include:
- Estate planning attorney fees
- Filing fees
- Trustee fees
- Other administrative costs
Following the creation of the trust, you should also consider additional costs for maintaining and administering the trust. These added costs may include trustee fees, investment management fees, property management fees, tax filing fees, and more.
The complete costs will depend on your unique circumstances, such as the size of the estate and the types of assets included. However, these costs will likely be offset by the benefits of the tax savings you receive from setting up a dynasty trust and avoiding generation-skipping taxes.
Legal Limitations and Complexities
Most states have relaxed or eliminated the key legal limitation for dynasty trusts, rule of perpetuities. That rule was designed to prevent trusts from lasting indefinitely. Although some states offer the ability for indefinite trusts, you should review your state’s laws for the maximum time period allowed for dynasty trusts. This law will determine how far you can pass assets across multiple generations.
The complexity of these trusts is another key consideration in setting up your estate plan, as establishing these trusts may require more rigid planning than a typical trust. Because you are planning for multiple generations, you will likely need to consider a lot more factors than a typical trust, such as the appointment of multiple successor trustees, the establishment of complex terms to direct how assets should be distributed, and the rights of remote beneficiaries.
Irrevocability
In both revocable and irrevocable trusts, the grantor gives the control of all assets transferred into the trust. In irrevocable trusts, including dynasty trusts, the grantor will also lose the ability to change terms of the trust, such as the identity of the beneficiaries or the criteria for making a trust distribution. Although this is a disadvantage shared by any type of irrevocable trust, not solely dynasty trusts, it is an important consideration in contrast to revocable living trusts if you prefer to maintain control over these assets.
Is a Dynasty Trust Right for Your Estate Planning?
While a dynasty trust offers many benefits, it may not be right for everyone. Typically, it is most advantageous for individuals and families with extensive wealth, as it is geared toward long-term generational wealth planning.
Consider the following:
- Assessing long-term goals – If you plan on preserving your assets to provide an inheritance to as many people in your family lineage as possible, beyond just your children and to your grandchildren and great-grandchildren, then a dynasty trust may be the right fit for distributing assets across these generations.
- Evaluating family needs – If your family has numerous children, grandchildren, and great-grandchildren, there will be more beneficiaries with expectations of receiving trust distributions, then a dynasty trust may be particularly beneficial for you and your family’s needs.
A dynasty trust is often a good option for high-net-worth individuals and large, complex estates with valuable assets. This type of trust provides unique asset protection over the course of multiple generations for individuals looking to leave a lasting legacy.
Can You Dissolve a Dynasty Trust?
Yes, a dynasty trust can be dissolved in some circumstances, depending on state law.
Under Texas Property Code section 112.054, a trustee or a beneficiary can petition the court to terminate the trust in whole or in part. This provision also allows judicial modification of trusts, which could potentially limit the length and scope of dynasty trusts. Importantly, judicial modification or termination can change a trust even if the grantor cannot. Judicial termination or modification may be appropriate if any of the following apply:
- The purposes of the trust have been fulfilled.
- The purposes of the trust have become illegal or impossible to fulfill.
- Termination will further the purposes of the trust due to circumstances not known to or anticipated by the settlor.
- Modification of administrative terms is necessary or appropriate to prevent waste or impairment of the trust’s administration.
- Termination is necessary or appropriate to achieve the settlor’s tax objectives or to qualify a distributee for governmental benefits and is not contrary to the settlor’s intentions.
- The continuance of the trust is not necessary to achieve any material purpose of the trust.
- Termination or modification is not inconsistent with the material purpose of the trust.
However, when determining whether to terminate or modify a trust, the court must conform as nearly as possible to the probable intention of the settlor in creating the trust, often outlined in the trust’s terms.
Additionally, Texas Property Code section 112.059 allows a trustee to terminate the trust if the trust property has a total value of less than $50,000 and the value of the trust property is insufficient to justify the continued cost of administration. The trustee does not need a court order to do this. They simply must provide notice to the beneficiaries and distribute the remaining property according to the terms of the trust.
In California, the ability to modify or revoke a dynasty trust is dependent upon the trust’s terms. Typically, these trusts cannot be altered as they are considered irrevocable. However, some trusts may include decanting provisions, which allow the transfer of assets to a new trust under certain conditions.
Can You Contest a Dynasty Trust?
Yes, as with any other trust, an interested party can contest a dynasty trust.
However, it’s important to note that you can’t contest a trust just because you don’t like what it says or that it exists. In order to successfully contest a trust, you must prove that the trust is legally invalid.
Some common reasons that a Texas or California dynasty trust can be contested include:
- The terms of the trust violate the Rule Against Perpetuities.
- The settlor lacked mental capacity make the trust.
- The trust agreement does not contain the fundamental terms necessary to create a trust.
- A third party induced the settlor to create the trust using undue influence, fraud, duress, or coercion.
- A third party forged the trust instrument or the settlor’s signature.
Oftentimes, contests to dynasty trusts can be settled through non-judicial settlement agreements. These agreements allow for the resolution of disputes, clarification of ambiguities, or modification of trust terms outside of court. It is important, however, to obtain the advice of a trust attorney before entering into any such agreement, because the agreement may not be valid if it violates requirements for modifications or if necessary persons were omitted from the agreement.
Who Can Contest a Dynasty Trust?
Under California and Texas law, only an “interested person” can contest a trust. According to California Probate Code Section 48 and Texas Property Code Section 111.004, the definition of an “interested person” includes any of the following:
- A trustee
- A beneficiary
- Any person having an interest in or a claim against the trust
- Any person who is affected by the administration of the trust
While trustees and named beneficiaries are always considered to be interested persons, whether another party—for example, someone who has a potential interest as a future beneficiary—is an interested person must be determined according to the particular purposes of any matter involved in the proceeding.
If you want to contest a dynasty trust, it’s important to contact an experienced trust litigation attorney as soon as possible to discuss your options. Trust contests are not impossible to win, but they are challenging and complex. A seasoned trust dispute attorney will be able to review the facts of your situation and provide guidance as to the feasibility of contesting the trust.
Case Scenario: The Use of Dynasty Trusts
The following hypothetical case scenario demonstrates how a situation may present itself in the real world. Although it’s important to remember that every case is different, you should always consult a lawyer for guidance regarding your unique situation.
Frederick Merrill was a high-level executive with a considerable estate size and assets he earned from his business, which he founded 30 years ago. His business success left him with a net worth of $200 million as he entered his golden years and began his estate planning.
He knew this amount of money would be enough to pass down not only to his children but also to his grandchildren and beyond. However, he wanted to maximize his investment for his family and protect the assets from being expended irresponsibly for years to come, so he considered a dynasty trust.
A dynasty trust was the best option for the Merrill family. Because the family had considerable wealth to pass down to future generations and wanted to avoid paying inheritance taxes with every generation, it made more sense to use a dynasty trust than a living or standard irrevocable trust, which would typically dissolve upon the distribution of assets to their children.
For assets to pass down to Frederick’s grandchildren without a dynasty trust, his children would have to create new estate planning documents to pass their inheritance to their own children, which would be subject to estate taxes and significantly reduce the inheritance of his future grandchildren.
For example, if Frederick chose to create a typical trust rather than a dynasty trust, he might leave a $100 million investment to his children tax-free, while leaving the other $100 million for his grandchildren. With a federal estate tax of up to 40%, tax deductions would leave only $60 million of the amount left to his grandchildren, not accounting for growth in investments. While a dynasty trust could not completely eliminate tax burdens, it could have reduced the trust’s total tax liability and maximized the amount the Merrill grandchildren received.
Merrill’s position also benefited from the use of a dynasty trust, as this format allowed for his assets to be placed in investment accounts and grow over the course of the trust, preserving family wealth and minimizing transfer taxes for decades.
Navigate Dynasty Trust Disputes With RMO Lawyers
Dynasty trusts are a valuable estate planning tool, but their longevity makes them more complex than other trusts, making it important to understand the nuances and the increased risk of disputes. If you are facing a dispute regarding a dynasty trust, the experienced litigators RMO may be able to help.
Our trust litigation attorneys have helped countless families navigate conflict regarding trustee and beneficiary disputes, including but not limited to trustee mismanagement or breach of fiduciary duty, disputes over trust modifications, beneficiary disputes, and challenges to the trust’s validity.
Schedule a consultation with us to learn more about how we can offer guidance in a dynasty trust dispute.
Glossary
Grantor – An individual who transfers their assets into a trust to be passed down to their children or future generations.
Settlor – Another word for “grantor,” a “settlor” is someone who creates a trust.
Trustor – A term synonymous with the settlor or grantor, referring to the person who establishes a trust and contributes assets to it.
Trust – A legal agreement that grants a third party, or fiduciary, the authority to hold and manage assets for the beneficiaries of an estate.
Beneficiary – An individual who is named in the trust as entitled to receive a share of assets included in the trust in the event of the settlor’s death.