Dynasty Trusts

Families should consistently seek methods to preserve family wealth for future generations. Developing an effective strategy to minimize estate transfer taxes is critical to preservation. Unfortunately, poor planning may result in repeated taxes on familial wealth which can heavily erode and diminish the value of an estate as it passes from generation to generation. Dynasty trusts, sometimes called legacy trusts, may be the answer for families looking to preserve long term wealth.

Basics
Dynasty trusts as so named can span across multiple generations. While each state has its own limits, there is no law requiring a dynasty trust to be established in the same state as the grantor’s residency as such, it is common to see Dynasty Trust in states with more favorable rules. Some states limit how long a trust can last, so you’ll want to site your trust in a state that allows trusts to exist in perpetuity—such as Alaska, Delaware, Illinois, Missouri, New Hampshire, Ohio, Rhode Island, and South Dakota—or for several hundred years, as is the case with Florida, Nevada, Tennessee, and Wyoming. As each generation of beneficiaries passes on, the trust is then split into sub trusts for each living beneficiary.

Dynasty trusts, when properly created, can last for many generations. These long-term trusts are meant to pass wealth from generation to generation without incurring the gift, estate, or generation skipping transfer tax as long as the assets remain in the trust. The long-term asset protection and financial benefits to future generations make this trust a widely used tool by high-net-worth individuals. In 2024, an individual can put up to $13.61 million in a dynasty trust.

Dynasty trusts are irrevocable trusts, meaning they cannot be altered after they are created and funded. Common provisions in dynasty trusts may include the ability to distribute funds to beneficiaries for certain purposes, including but not limited to, education and/or medical expenses. These trusts may include provisions for the trustee to distribute funds to beneficiaries based on certain criteria, such as age or life events. Age provisions can give grantors peace of mind that younger beneficiaries will not go wild with their trust money or waste it.

Asset Protection
Random and unexpected events happen in everyone’s lives. One single car accident can be catastrophic to a person’s estate if the damage awards exceed assets owned. Dynasty trusts can provide asset protection against future creditors of the beneficiaries in the case where something goes wrong. Since the beneficiaries do not have control over the assets, the trust’s assets are protected from claims by the beneficiary’s creditors as the assets belong to the trust, not the individual beneficiary.

Tax Considerations
If the assets exceed federal tax exemptions, the assets transferred to the trust can be subject to gift, estate, and generation-skipping trust (GSTT) taxes but only when the asset is originally transferred to the trust. It is important to note income taxes may apply to dynasty trusts that produce income. When considering income tax minimization, individuals tend to transfer assets to dynasty trusts that do not produce taxable income in order minimize the income tax burden. Some examples of non-income producing assets are non-dividend paying stocks and tax-free municipal bonds.

Assets placed in a dynasty trust are considered to be removed from the grantor’s taxable estate. When those assets in the dynasty trust appreciate, the appreciation and gain are also not included in the taxable estate of the grantor. As for beneficiaries, they lack control over the trust’s assets, so any money distributed in accordance with the trust’s terms will not count toward their respective taxable estates.

Best States Allowing Dynasty Trusts
The following states (best to worst) currently allow for the creation of dynasty trusts: South Dakota, Nevada, Tennessee, Arkansas, Rhode Island, Wyoming, Delaware, Ohio, Missouri, New Hampshire, Illinois, and Florida.

Pros and Cons

Pros

• Asset Management
• Financial Support for Subsequent Generations
• Asset Protection
• Reduce Taxation
• Avoid Probate

Cons

• Lengthy Fiduciary Responsibilities
• Inflexible
• Irrevocable
• Complexity of Trust Administration

Final Thoughts
Trusts of any kind can be complicated, to create, fund, and administrate. This is especially true when the trusts are specifically tailored to suit your needs and desires. RJS LAW’s experienced tax, trust, and estate attorneys are able to discuss options and create the optimal trust to preserve and transfer familial wealth. For a no cost consultation, please contact our attorneys via the web at RJS LAW or by phone at 619-595-1655.

Written by Sean Erdman