What Is a Dynasty Trust?
A dynasty trust is a type of irrevocable trust created to pass wealth from generation to generation while minimizing taxes. As long as the assets remain in the dynasty trust, future generations likely won’t have to pay estate taxes, gift taxes, or generation skipping transfer (GST) taxes.
When establishing a dynasty trust, grantors can set whatever rules they want for how the trustee should manage the assets and distribute funds to beneficiaries. However, after the grantor funds the trust and it becomes irrevocable, they will not have any control over trust property and will have restrictions on their ability to change the trust’s terms.
What distinguishes dynasty trusts from other types of irrevocable trusts is its duration. Most trusts cannot exist forever because the “Rule Against Perpetuities” terminates them automatically after a few generations.
Fortunately, as perpetual trusts, dynasty trusts are carefully structured to avoid the Rule Against Perpetuities. If you set up a dynasty trust correctly, it can remain intact for many generations, making it an essential estate planning tool for families with significant wealth.
How Does a Dynasty Trust Work?
The Rule Against Perpetuities puts a time limit on how long a trust could last after the death of the last potential beneficiary who was alive when the trust was created. The common law limitation was 21 years, but many states have either eliminated the Rule against Perpetuities or extended that time. Therefore, you can create a dynasty trust in any of these states.
Grantors can design dynasty trusts to allow beneficiaries to have almost total control over the trust property. In some circumstances, a beneficiary can be the sole trustee of a dynasty trust established for their benefit. However, it’s important to note that as the beneficiary’s ability to control the trust property increases, the property becomes more available to the beneficiary’s creditors.
A grantor may also choose to establish a more restrictive dynasty trust and employ a professional trustee to prevent beneficiaries from abusing family wealth. The possible control structures are numerous and can include sophisticated plans such as a “family council” that allows family input into the trust’s administration.
What Are the Advantages of a Dynasty Trust?
In addition to the obvious benefit of its duration, one of the primary advantages of a dynasty trust is the various types of tax relief offered. As a result of the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption in 2020 is $11.58 million. This means that under current legislation every individual can put $11.4 million in a dynasty trust without having to pay any gift tax, estate tax, or GST tax.
A well-planned dynasty trust can be used to avoid or defer state and local income tax in some situations. Additionally, the property that the grantor transfers to the dynasty trust and the appreciation value of that property is permanently removed from the grantor’s taxable estate, which provides even more tax relief.
Another tax advantage offered by a dynasty trust is that where beneficiaries lack control over the trust property it is not counted toward their taxable estates. Similarly, because the trust owns the dynasty trust assets and not the beneficiaries, a beneficiary’s creditors cannot go after trust property to pay for the beneficiary’s debts. As long as the assets remain in the trust, and the beneficiaries don’t have control over directing distributions, their creditors will have difficulty accessing those assets in all but a few limited circumstances.
What Are the Disadvantages of a Dynasty Trust?
There are some disadvantages of a dynasty trust. First, because dynasty trusts are irrevocable, neither you nor your beneficiaries can alter the terms of the trust if family or financial circumstances change, absent court intervention. Because dynasty trusts are designed to last for generations, this means that you will have to guess about what will be beneficial for your descendants decades, or even longer, in the future.
As with all irrevocable trusts, the property you transfer to a dynasty trust may incur gift taxes if above the exemption amount. You can usually avoid the imposition of gift tax by limiting your transfers to the amount of your remaining lifetime gift tax exemption. A gift to a dynasty trust may also be subject to GST tax. However, since the lifetime exemption from GST tax is generally equal to or greater than the gift tax exemption, if you limit your transfers to avoid gift tax, you will likely also avoid GST tax.
Additionally, income taxes still apply to assets in a dynasty trust.
Which States Allow Dynasty Trusts?
Some states have maintained the 21-year Rule Against Perpetuities, and therefore do not allow dynasty trusts. The top tier states for dynasty trusts are Alaska, Delaware, Nevada, and South Dakota because they allow dynasty trusts and do not impose state income tax on trusts.
The states that have allowed dynasty trusts by abolishing the rule against perpetuities, allowing perpetual dynasty trusts include:
- District of Columbia
- New Hampshire
- New Jersey
- North Carolina
- Rhode Island
- South Dakota
Some states have allowed dynasty trusts by enacting an opt-out for the Rule Against Perpetuities or making A different change to the Rule Against Perpetuities. Information about the rules in these states is detailed in the table below.
|State||Rule Against Perpetuities|
|Alaska||Perpetual; 1,000 years if a power of appointment is exercised|
|Delaware||Perpetual for personal property; 110 years for real estate|
What if I’m Not Getting My Dynasty Trust Distributions?
When you get your dynasty trust distributions depends on the specific terms of the trust. Suppose you are a beneficiary of a dynasty trust and you’re entitled to receive money under the terms of the trust. In that case, the trustee is required to give you your money. While trustees are given various levels of discretion, their authority is usually limited to some extent.
Beneficiaries who do not receive the distributions they are entitled to based on the dynasty trust terms can take legal action against a trustee to recover what’s owed to them and, perhaps, even have the trustee suspended, removed or surcharged for breaching their fiduciary duties.
When should I contact a dynasty trust lawyer?
If you are a dynasty trust beneficiary who is not receiving proper distributions or if you are interested in creating your own dynasty trust, you should consult with a dynasty trust lawyer, immediately. Because dynasty trusts must be correctly structured to avoid the Rule Against Perpetuities and trust tax laws are complicated, you should seek an experienced attorney’s assistance, versus trying to manage a complex situation like this on your own.
The consultation is always free.
About RMO, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri, and Kansas. Our founder, Scott E. Rahn, has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com.