Dynasty Trust

Dynasty Trust

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. 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 immediate beneficiaries of a dynasty trust are usually the children of the grantor (the person whose assets are used to create the trust). Moreover, the assets that go into a dynasty trust, as well as any appreciation on those assets, are permanently removed from the grantor's taxable estate, providing another layer of tax relief. Assets that are transferred to a dynasty trust can be subject to gift, estate, and GSTT taxes only when the transfer is made and only if the assets exceed federal tax exemptions.

Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes.

What is a Dynasty Trust?

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 it's properly designed, it can last for many generations, possibly forever.

A dynasty trust that's established in the right state can theoretically last forever.

Dynasty trusts allow wealthy individuals to leave money to future generations, without incurring estate taxes.
Under current law, an individual can put up to $11.58 million in a dynasty trust.
Dynasty trusts are irrevocable and their terms cannot be changed once funded.

How a Dynasty Trust Works

Historically, trusts could only last a certain number of years. Many states had a "rule against perpetuities" and stipulated when a trust had to come to an end. A common rule was that a trust could continue for 21 years after the death of the last beneficiary who was alive when the trust was established.

Under those circumstances, a trust could theoretically last for 100 years or so. Some states, however, have done away with rules against perpetuities, making it possible for wealthy individuals to create dynasty trusts that can endure for many generations into the future.

The immediate beneficiaries of a dynasty trust are usually the children of the grantor (the person whose assets are used to create the trust). After the death of the last child, the grantor's grandchildren or great-grandchildren generally become the beneficiaries. The trust's operation is controlled by a trustee who is appointed by the grantor. The trustee is typically a bank or other financial institution.

A dynasty trust is a type of irrevocable trust. Grantors can set strict (or lax) rules for how the money is to be managed and distributed to beneficiaries. But 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.

Assets that are transferred to a dynasty trust can be subject to gift, estate, and GSTT taxes only when the transfer is made and only if the assets exceed federal tax exemptions. As a result of the Tax Cuts and Jobs Act passed in 2017, the federal estate tax exemption is $11.58 million for 2020 and $11.7 million for 2021. The amount is adjusted annually for inflation.

Of course, Congress could also raise or lower the estate tax exemption in future years, or do away with the estate tax entirely. So, for now, an individual can put $11.58 million in a dynasty trust for his or her children or grandchildren (and, in effect, their children and grandchildren) without incurring these taxes. Moreover, the assets that go into a dynasty trust, as well as 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. But 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 to the beneficiary.

However, income tax will still apply to a dynasty trust. To minimize the income tax burden, individuals often transfer assets to dynasty trusts that don't produce taxable income, such as non-dividend paying stocks and tax-free municipal bonds.

Related terms:

A-B Trust

An A-B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes. read more

Account in Trust

An account in trust is a type of financial account opened by one person for the benefit of another. read more

Beneficiary of Trust

A beneficiary of trust is the individual or group of people chosen to benefit from trust assets and the income they generate. read more

Beneficiary

A beneficiary is any person who gains an advantage or profits from something typically left to them by another individual. read more

Credit Shelter Trust (CST)

A credit shelter trust allows a surviving spouse to pass on assets to their children, free of estate tax.  read more

Dynasty Trust

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring estate taxes. read more

Estate

An estate is the collective sum of an individual's net worth, including all property, possessions, and other assets. Discover more about estates here. read more

Estate Planning

Estate planning is the preparation of tasks that serve to manage an individual's asset base in the event of their incapacitation or death. read more

Generation-Skipping Transfer Tax—GSTT

Generation-skipping transfer tax is a federal tax on a transfer of property by gift or inheritance to a beneficiary that meets certain requirements. read more

Grantor Trust Rules

Grantor Trust Rules outline responsibilities of the trust's creator for income and estate tax purposes. read more