A dynasty trust (also known as a perpetual trust) is an irrevocable trust that can span more than two generations. In fact, it can theoretically last forever or as long as the trust money and property remain.
As an irrevocable trust, dynasty trusts offer tax minimization and asset protection. Because the rules of an irrevocable trust cannot be changed once the trust is created, much thought and planning should go into establishing a dynasty trust. The rules the grantor sets for the trust can only be altered under certain state statutes that govern trust modifications.
Dynasty trusts are not an option in every state. The rule against perpetuities is a common law rule that limits the duration of controlled property interests. This includes interests in trusts. However, the rule is hard to decipher, leading many states to extend the applicable term or eliminate the law altogether. Your estate attorney may be able to assist you in establishing a dynasty trust in another state that allows them, even if the state you reside in does not.
Who Should Establish a Dynasty Trust?
Laws do not stipulate how much money you need to set up a dynasty trust. However, unlike most types of trusts, dynasty trusts are typically used by people with significant wealth. A dynasty trust only makes sense if you have money and property that is expected to last for two or more generations. Of course, the amount needed depends on the monetary needs of your beneficiaries and how fiscally responsible they are.
Families that want to keep a family business in the family may also choose to use a dynasty trust. Statistically, the longevity of a family business is not encouraging. Only about 40% of family-owned businesses transfer to the second generation, 13% to the third generation, and just 3% to the fourth generation.
A grantor can overcome this by placing shares of the business in a dynasty trust so they will be available for future generations. The grantor could appoint a professional trustee and include terms that ensure the business is competently run. The grantor may also require the trustee to have an advisory council that functions like a board of directors.
How to Establish a Dynasty Trust
Important points to consider when establishing a dynasty trust include:
- The trustmaker (grantor, creator) transfers money and property into the trust. This transfer can take place during their lifetime or after their death. If they make the transfer upon death, the trust is called a testamentary dynasty trust.
- Once the trust is established, its terms cannot be revoked.
- Due to the length of the trust lifetime, consider who to appoint as trustee carefully. Many times, grantors of dynasty trusts appoint banks or trust companies as trustees. Corporate trustees have an indefinite legal life, just like a dynasty trust. Corporate trustees typically charge an annual fee to administer the trust. This fee is based on the value of the money and property in the trust.
- A beneficiary could serve as the trustee, but this may raise potential tax and credit protection issues. A beneficiary-controlled trust might have income and estate tax ramifications, depending on the structure of the trust and the scope of the beneficiary’s powers.
- If a beneficiary acts as the trustee, this can affect the degree of asset protection the trust provides that beneficiary, and it increases the risk of misappropriation of the family wealth.
- The federal tax exemption for 2023 is $12.92 million per individual and $25.84 million for married couples. Individuals or married couples can use this exemption to fund a dynasty trust so money and property transferred to their grandchildren will not be subject to gift or generation-skipping transfer (GST) taxes.
- Assets are not included in your taxable estate if you place them in a trust and file a gift tax return to assign applicable tax exemptions to the trust or have the trust pay any wealth transfer tax. If the trust is totally exempt from GST taxes, your beneficiaries can do the same.
- Dynasty trusts provide asset protection. Creditors and divorce courts cannot touch accounts and property in a dynasty trust as long as it is properly drafted.
If you think a dynasty trust would be right for you, contact us for more information. We can discuss state laws on perpetual trusts, tax and creditor protection considerations, trustee and beneficiary selections, and how a dynasty trust may be an important part of your comprehensive estate plan.