A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes—such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT)—for as long as assets remain in the trust. The dynasty trust’s defining characteristic is its duration. If properly designed, it can last for many generations.
Key Takeaways
- Dynasty trusts allow wealthy individuals to leave money to future generations without incurring estate taxes.
- In 2024, an individual can put up to $13.61 million in a dynasty trust.
- Dynasty trusts are irrevocable, and their terms cannot be changed once funded.
Flexible yet Enduring Rules
Historically, many states had a rule against “perpetuities” and stipulated when a trust had to end. A common rule was that a trust could continue for 21 years after the death of the last beneficiary alive when the trust was established. Under those circumstances, a trust could theoretically last for 100 years or so.
Some states, however, allow wealthy individuals to create dynasty trusts that can endure for many generations into the future. A dynasty trust is a type of irrevocable trust. Grantors can set rules for how the money will be managed and distributed to beneficiaries. Once the trust is funded, the grantor will not have any control over the assets or be permitted to amend the trust’s terms. The same is true for the trust’s future beneficiaries.
Thoughtful Beneficiary Selection
The immediate beneficiaries of a dynasty trust are usually the grantor’s children. After the last child’s death, the grantor’s grandchildren or great-grandchildren generally become the beneficiaries. The trust’s operation is controlled by a trustee whom the grantor appoints. The trustee is typically a bank or other financial institution.
Anyone can be appointed as a trustee, but an organization with a proven history of managing long-term trusts is beneficial because a dynasty trust can last for a long time.
Proactive Tax Solutions
Assets transferred to a dynasty trust can be subject to gift, estate, and GSTT taxes only when the transfer is made and if the assets exceed federal tax exemptions. However, income taxes apply to a dynasty trust if assets produce income. Therefore, individuals often transfer assets to dynasty trusts that don’t produce taxable income to minimize the income tax burden, such as non-dividend paying stocks and tax-free municipal bonds.
Additionally, the assets that go into a dynasty trust and any appreciation on those assets are permanently removed from the grantor’s taxable estate, providing another layer of tax relief. A trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms. Because beneficiaries lack control over the trust’s assets, it will not count toward their taxable estates. Similarly, the trust’s assets are protected from claims by a beneficiary’s creditors because the assets belong to the trust, not the beneficiary.
Is a Dynasty Trust Beneficial?
Establishing a trust can have benefits and drawbacks depending on your financial situation. If an individual has significant assets and wishes to create a legacy of wealth for their family, a dynasty trust might be a good idea.
Weighing Dynasty Trust Downsides
Individuals lose control of all assets within the trust because it is irrevocable. Additionally, they cannot change the terms of the trust once it is created.
Understanding Tax Responsibilities
The grantor is responsible for paying taxes on a dynasty trust. The beneficiaries pay income taxes if they receive income from the trust, and generation-skipping taxes are deferred until the trust terminates and the final beneficiaries receive the remaining assets.
The Bottom Line
Individuals with significant taxable assets in their estates benefit the most from dynasty trusts. The dynasty trust becomes the asset owner, so the assets are not included in the estate when the grantor dies. In 2024, an individual can put up to $13.61 million in a dynasty trust.
Related Terms: Trust, Beneficiary, Generation-Skipping Transfer Tax, Irrevocable Trust.
References
- Charles Schwab. “The Case for Establishing a Dynasty Trust”.
- Washington University in St. Louis, Open Scolarship. “The Rule Against Perpetuities Applied to Trusts”, Page 286.
- Internal Revenue Service. “What’s New - Estate and Gift Tax”.
- Internal Revenue Service. “Estate Tax”.
