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Should I Set Up a Dynasty Trust to Preserve Wealth For My Heirs?

September 24, 2015

Looking to preserve wealth for your heirs? Consider a dynasty trust—it is a trust that essentially lasts forever.

For many wealthy families, an irrevocable dynasty trust can play an important role in multi-generational planning.

A dynasty trust allows you to transfer assets - a business, real estate or other income-producing property - to a trust in order to preserve wealth for your heirs. As with many trust arrangements, a dynasty trust provides a degree of control over these assets even after you pass and makes sure that your beneficiaries are not tacked with burdensome tax responsibilities. If you have an interest about the many benefits of a dynasty trust, talk to your estate tax adviser.

The ins and outs of dynasty trusts

There are a few things you will want to know about dynasty trusts. This includes:

  • If transfers are handled properly, gift tax, estate tax, and the generation skipping transfer tax can be avoided both currently and for future generations.
  • Usually a dynasty trust is designed as an “inter-vivos” trust (funded during life), but it can also be set up at your death if there is a provision in your estate plan (will or revocable trust) to do so.
  • The income of a dynasty trust can be accumulated or paid out to the trust’s beneficiaries under specific trust provisions, which might include children, grandchildren or distant relatives.
  • While you are living, using the so-called grantor trust rules, you can pay the income tax associated with the dynasty trust income – a powerful transfer tax planning tool.
  • The person you choose as trustee may have discretion to invade the trust principal if need be.
  • If the assets remain in the dynasty trust, these assets will generally not be treated as part of the beneficiary’s estate at the time of his/her death.
  • You do not have to worry that erosion due to estate tax will affect your funds—the funds can continue to compound over multiple generations.
  • You won’t have to worry about your heirs recklessly spending since the trust funds are managed and controlled by the trustee of your choice.
  • Apart from the positive tax benefits, there is also important protection against loss from creditors (including spouses) since the assets are not owned directly by the beneficiaries.

How long can a dynasty trust last?

Sometimes called a legacy or perpetual trust, a dynasty trust can, by nature, last forever. There is, however, a law in certain states called the “Rule Against Perpetuities” that puts a limit on the duration of a dynasty trust, which varies by state.

Keep in mind that this is only scratching the surface of this technical subject. You will want to seek counsel from your estate planning adviser for more information on dynasty trusts and details on how state law will impact your specific situation.

Questions? Contact any member of our Private Client Services Team.

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