What Is a Dynasty Trust?

Executive Summary

• A dynasty trust is a type of irrevocable trust that is intended to last for multiple generations and pass down assets to family members with improved tax efficiency.
• The benefits of a dynasty trust include the ability to preserve assets for multiple generations of heirs and avoid generation-skipping taxes.
• 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. A typical living trust is limited in that it only passes assets to a grantor’s immediate beneficiaries. 

However, a dynasty trust provides a method for transferring wealth across multiple generations and with the greatest 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. You should consult with a qualified estate planning attorney if you are considering establishing a dynasty trust. 

States like California and Texas allow dynasty trusts to be established for set periods of time. Understanding what a dynasty trust is will allow you to make the best possible choice for protecting your assets and maximizing the value of the assets your descendants receive.

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. The person who initially creates the trust, who is known as the “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. 

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 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.

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 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 his grandchildren and beyond. However, he wanted to maximize his investment for his family and protect the assets from being claimed irresponsibly for years to come, so he considered a dynasty trust.

We will revisit Mr. Merrill, his trust, and potential complications he might face later in this article. 

How Does a Dynasty Trust Work? 

Dynasty trusts are unique from other trusts in a few key ways. Once assets are transferred into a dynasty trust, they are removed from the estate and preserved for future generations. Through this mechanism, the trust is able to avoid estate and generation-skipping taxes. 

Creating a dynasty trust under the appropriate procedures involves a detailed process—it’s important to draft the trust carefully so that it accurately protects the grantor’s assets without locking out future generations from enjoying the benefits of the trust.

Some of the steps involved in this process include:

• Designating a trustee and successor or alternate trustees to manage the trust and its assets after a grantor’s death
• Consulting legal and tax professionals to ensure that the trust achieves your goals
• Anticipating future challenges or improper attempts to claim trust assets
• Including provisions to protect assets from potential risks

It’s important to understand how long a dynasty trust will last, as the duration of a dynasty trust is largely determined by state laws. Both California and Texas have rules against perpetuities, which means that these trusts cannot last indefinitely. In California, a dynasty trust can last for as long as 90 years. Meanwhile, in Texas, a dynasty trust can last a lot longer—up to 300 years. In Texas, however, dynasty trusts cannot retain real property assets for more than 100 years. 

Comparing Dynasty Trusts to Other Types of Trusts

Before considering a dynasty trust, it’s important to understand how it stacks up against other types of trusts. Considering the advantages of different trusts will help you determine which option is best for you and your assets.

Dynasty Trusts vs. Living Trusts

A typical living trust is a trust created by a grantor to hold and distribute assets during the grantor’s lifetime and outline the grantor’s intentions for their assets upon their death. A dynasty trust also highlights how the grantor would like their assets to be distributed upon their death—the key difference between the two types is the duration of which the trusts last. 

Instead of dissolving the trust once the grantor’s assets have been distributed, like in a typical living trust, a dynasty trust is designed to last for generations. 

Dynasty Trusts vs. Revocable Trusts

Most revocable trusts are designed so that a grantor can make changes to the trust at any point before their death. However, after a grantor passes away, a revocable trust usually becomes irrevocable. From there, the trustee must distribute assets according to the terms outlined in the trust. A dynasty trust is closely related to an irrevocable trust, as it cannot be easily changed after being created, even by the grantor. 

Dynasty Trusts vs. Testamentary Trusts

A testamentary trust is a trust that’s set up by an individual’s will. The trust is not established until an individual passes away and the will takes effect. Because a testamentary trust is part of a will, it is generally considered revocable, as a grantor can change the will up until their death. However, after their death, the trust is considered irrevocable and often cannot be changed without a legal contest. 

In theory, a dynasty trust can be a type of testamentary trust if the dynasty trust is created by a will. If an individual chooses to structure their trust in this manner, it’s crucial that they closely consult a lawyer in order to create the trust in a way that maximizes the tax benefits and achieves the goals of the grantor.

Dynasty Trusts vs. Asset Protection Trusts

Asset protection trusts are a type of trust often used to hold an individual’s assets and shield them from creditors. These trusts offer the benefit of enhancing the protection but also add a layer of complexity to accessing the assets in the long term. A dynasty trust can offer some protections against creditors if structured with spendthrift provisions, but this protection is not a primary benefit. 

Given the differences between the two, the situations in which you would choose one trust over the other are rather distinct. The primary focus of an asset protection trust is to shield the assets from creditors, lawsuits, and similar claims. Meanwhile, the primary purpose of a dynasty trust is the preservation of long-term wealth and tax efficiency.

Who Should Consider a Dynasty Trust?

Dynasty trusts are usually best for individuals or families with substantial assets who seek to preserve their wealth for future generations. If you have a high net worth and own considerable assets that you intend to pass down to your future heirs, a dynasty trust may be a good idea. 

You may consider exploring the benefits of a dynasty trust if any of the following scenarios apply: 

• Your family has a considerable number of assets to share with future generations
• You plan to pass assets down through multiple generations 
• You want to protect your assets long-term and minimize future trust planning

If you think a dynasty trust may be a strong option for protecting and passing down your family’s assets, you should consult an estate planning attorney to discuss your options. 

In our case scenario from above, 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 dollar 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. A dynasty trust could have eliminated this risk 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.

Cost Considerations for Dynasty Trusts 

Before setting up a dynasty trust, you should consider the costs involved in the process. Because a dynasty trust is more complex than a standard trust, it may be more costly to set up because of the legal fees associated with the extra time needed to ensure the trust covers your immediate needs and future plans. However, these additional costs may be worth it down the line based on the tax savings that will take place from generation to generation. 

The most important costs to consider are: 

• Initial setup costs – setting up a trust initially includes legal fees, trustee fees, filing fees, and other administrative costs. 
• Ongoing administration expenses – expenses associated with the ongoing administration of the trust include tax filings, trustee fees, investment management fees, and more. 
• The likelihood that someone may challenge the trust, causing the trust to incur additional legal fees for its defense.

Typically, costs depend largely on the nature of a dynasty trust. For example, complex estates with a variety of assets, including businesses, multiple properties, and a large number of beneficiaries may be more costly to set up.

Legal Support for Dynasty Trusts

If you are considering setting up a dynasty trust, an attorney’s advice and assistance will be indispensable. You will need a trust attorney who is well-versed in dynasty trusts and the necessary trust provisions while maintaining a deep understanding of your assets and intentions.

Trust attorneys understand the detailed legal requirements necessary for setting up a successful trust. This knowledge will be valuable in ensuring the trust covers all of the necessary criteria to be enforceable under the law and provides the appropriate tax benefits. 

With a firm understanding of laws surrounding how to set up an enforceable dynasty trust, an attorney will be able to closely review your trust and ensure it achieves your long-term goals of transferring your assets to future heirs.

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 dynasty 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. 

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 to get 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 was not mentally capable of making a trust.
• The settlor did not follow the required formalities when making the 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 contradicts the trust. 

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 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. 

Facing a Dispute with a Dynasty Trusts?

If you are facing a dispute regarding a dynasty trust, RMO Lawyers may be able to help. We 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.