• Dynasty Trusts Can Help You Leave a Generations-Spanning Legacy

  • Trusts generally are used to reduce tax and help individuals leave wealth to their loved ones. But most trusts don't last forever and applicable taxes may discourage trust owners from leaving wealth to generations beyond, say, their grandchildren. However, a dynasty trust is different in that it specifically enables a wealthy family to arrange for a long-term transfer of wealth by preventing tax from being imposed on each generation. It also offers some nontax advantages.


    Tax Advantages

    Here's the challenge. Without a dynasty trust, a parent could leave assets to adult children that could then be subject to federal estate tax if the amount is large enough. If the adult children then pass the assets to their children, the assets would be taxed again, and so on. Although the federal gift and estate tax exemption can shield the bulk of assets from tax for most families ($13.61 million exemption in 2024), the top federal estate tax rate on the excess is a hefty 40%. Furthermore, the generation-skipping transfer (GST) tax applies to certain transfers made to grandchildren, thereby discouraging transfers that skip a generation. The GST tax exemption and 40% GST tax rate are the same as they are for regular gift and estate tax.

    Dynasty trusts initially were used to minimize transfer tax between generations (they arose after the creation of the GST tax). Assets are taxed just once — when they're initially transferred to the trust — and the intention is that the trust will hold them for many years. Because the emphasis of a dynasty trust is to protect appreciated property, owners usually fund them with such assets as securities, real estate, life insurance policies and business interests.

    There's no estate or GST tax due on any subsequent appreciation in value of trust assets. But when the assets are subsequently sold, any gain will be taxable. Note that the basis of the assets will be determined at the time of the initial transfer, although depending on the circumstances, the "step-up in basis" rules may help to reduce the taxable amount. Such rules adjust the value — or basis — of an inherited asset when it's transferred after death.

    Nontax Advantages

    Regardless of the tax implications, there are many nontax reasons for a wealthy individual to set up a dynasty trust. For example, you can designate the trust's beneficiaries spanning multiple generations. Typically, you might provide for the assets to follow a line of descendants, such as your children, grandchildren, great-grandchildren, etc.

    You can also impose certain restrictions, for example, limiting access to funds until a beneficiary graduates from college or gets a job. The trust also can protect assets from beneficiaries' creditors, including if they divorce or are sued.

    Make sure you also become familiar with some possible pitfalls. For example, dynasty trusts are irrevocable, which means you probably won't be able to make significant changes once the trust is in force. This may become an issue with future beneficiaries whose needs you probably can't anticipate.

    Nuts and Bolts

    You can establish a dynasty trust during your lifetime, as an inter vivos trust, or as part of your will as a testamentary trust. If you make an inter vivos transfer of assets to the trust, you'll avoid estate tax on any appreciation in value from the time of the transfer until your death. Generally, though, with an inter vivos transfer, assets won't be eligible for step-up in basis at your death.

    There's also the question of choosing a trustee. While it may seem natural to choose a succession of family members to act as trustee, that may not be the best route. For one, it could lead to family discord. It's probably safer to name a professional trustee who is also a fiduciary, such as a CPA, attorney or banker.

    Rule Against Perpetuities

    It's worth noting that until relatively recently, most states enforced a common law principle called "rule against perpetuities," that prohibited trusts from lasting indefinitely. Most states used to require trusts to end within 21 years of the death of the last potential beneficiary at the trust's creation.

    More recently, some states have adopted a simplified version of the rule and more than half have lifted restraints on trust durations, paving the way for an increased use of dynasty trusts. A handful of states — including Delaware, Alaska and Florida — encourage nonresidents to set up dynasty trusts in their jurisdictions. If your state still follows the rule, ask your estate advisor about potentially establishing a dynasty trust elsewhere.

    Possible "Forever" Trust

    Dynasty trusts are capable of holding some assets for generations, even "forever." Not only can your family save a bundle in tax dollars over time, but it will have a lasting family tradition of financial security to rely on. But to help ensure your dynasty trust meets its objectives, work with an experienced estate professional.

  • PKS Investment Advisors ("PKS") do not provide tax or legal advice. The content discussed in this article is for informational purposes only and should not be considered tailored advice. PKS is a registered investment advisor with the Securities and Exchange commission. Reference to registration does not imply any particular level of qualification or skill. Estate and Tax regulation change regularly. information is current as of date of publishing.