What is a Dynasty Trust?

Jim B.

A dynasty trust is a trust set up by an individual to pass wealth on to not only his or her children, but even to future descendants who survive long past the death of the individual. The trust is advantageous to immediate descendants because it allows them to avoid estate taxes. In most cases, a trustee chosen by the grantor of the trust is responsible for managing the funds and allocating them to the grantor's descendants. This type of trust also provides stability for future generations and often contains built-in protection against creditors. Although the United States (US) Congress mitigated the strength of dynasty trusts with a law passed in 1986, an exemption still exists that allows a limited amount of funds to be transferred to a dynasty trust tax-free.

Dynasty trusts are often set up to pass on wealth from an individual to his children.
Dynasty trusts are often set up to pass on wealth from an individual to his children.

Created as a way for wealthy individuals to ensure that the legacy of their wealth continues for their family into future generations, a dynasty trust is funded by the grantor of the trust and can, depending on the laws of specific states, last in perpetuity. The advantage is that it can provide wealth to the current and future generations without being subject to transfer taxes, such as estate or gift tax. Once the trust is funded, the grantor cedes control over the allocated funds.

The grantor can help to set the terms by which the trust is administered. This is done by choosing a trustee to handle the dynasty trust. Duties of the trustee include administration of the trust, investing the funds therein, and distribution of assets. All of these duties are generally performed based on instructions agreed upon with the grantor at the inception of the trust. Trustees can be one or more individuals chosen by the grantor; in some cases, the trustee can even be a bank.

One of the other main benefits of dynasty trusts is that they are protected from unpredictable circumstances that may befall descendants. For example, if a descendant faces a large debt, creditors cannot make a claim on anything in the fund until it is legally transferred to the descendant in question. This is generally achieved through a spendthrift clause, which also protects the trust from money owed for circumstances like divorce or child support.

In 1986, Congress passed a law that curbed the power of dynasty taxes. This law created a tax known as the generation-skipping transfer tax. It ensured that any gifts to future generations, even in the form of a dynasty trust, are taxable. Certain amounts are exempt from these taxes. Individuals can transfer up to $1 million US Dollars (USD) into a dynasty trust during their lifetime that is not subject to transfer taxes. If the trust is begun upon the grantor's death, that amount goes up to $1.5 million USD.

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Discussion Comments

Paul Murray

These trusts create a de-facto moneyed aristocracy, whose wealth is beyond reach of (existing) laws.

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