A dynasty trust is a type of irrevocable trust that can be used to pass wealth from generation to generation. Its primary purpose is to minimize taxes. While the property remains in trust, it is not subject to estate, gift, or generation-skipping transfer (GST) taxes.
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 dynasty trust becomes irrevocable once it is funded, so the settlor’s ability to modify the trust’s terms will be restricted.
What makes a dynasty trust different than 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, starting on September 1, 2021, amendments to Texas Property Code 112.036 changed the time limit to 300 years after the effective date of the trust for trusts with an effective date of September 1, 2021. This means that dynsasty trusts can now be used in Texas.
Can You Dissolve a Dynasty Trust?
Yes, a dynasty trust can be dissolved in some circumstances.
Under Texas Property Code 112.054, a trustee or a beneficiary can petition the court to terminate the trust in whole or in part 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.
- 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 is not inconsistent with a material purpose of the trust.
However, when determining whether to terminate 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 112.059 allows a trustee to terminate the trust if the trust property has a total value of less than $50,000 and that 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.
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 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 required formalities when making the trust.
- A third party induced the settlor to create the trust using undue influence, fraud, duressm or coercion.
- A third party forged the trust instrument or the settlor’s signature.
Who Can Contest a Dynasty Trust?
Under Texas law, only an “interested person” can contest a trust.
According to Texas Property Code 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 beneficiary are always considered to be interested persons, whether another party is an interested person must be determined according to the particular purposes of and 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 attorney will be able to review the facts of your situation and provide guidance as to the feasibility of contesting the trust.
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About RMO, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Ventura, Santa Barbara, San Francisco, 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.