Dynasty Trusts: True Tax-Free Wealth Protection for Generations?
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Last week, one of our Private Wealth planning clients asked about a dynasty trust. She’d read that it let people pass their wealth onto their children, grandchildren and future generations tax-free. Virtually forever.
She’s half right. Dynasty trusts are indeed an easy way for people to pass on their wealth for generations. They do offer some tax advantages (especially against estate and gift taxes). And they offer excellent asset protection.
But they don’t fit in every plan.
In this article, I’ll tell you how to figure out if a dynasty trust is right for you, or if something else might be a better fit for your plan.
What is a Dynasty Trust?
A dynasty trust is an irrevocable trust designed to transfer wealth across multiple generations without gift or estate tax as long as the assets remain within the trust.
How Dynasty Trusts became a Wealth Preservation Powerhouse
The concept of a trust has been around for nearly 1,000 years under the English common law system. However, they’ve long suffered from something called the Rule Against Perpetuities. This rule prevents a trust from lasting forever. In places with this rule, it’s not possible to keep family assets together over really long periods of time.
Because US law is based on English common law, early American trusts had the same problem.
But things changed in the late 20th century when some states like Delaware and South Dakota updated their laws to allow for perpetual trusts. Used together with certain tax strategies, these legal changes created what amounts to a “forever trust”.
Key Advantages of a Dynasty Trust
Passing Wealth Down Through the Generations: Traditional trusts expire 21 years after the death of the longest living beneficiary. Dynasty trusts offer a way to keep assets stored away for a very long time over multiple generations.
Asset Protection: Irrevocable trusts as a whole offer strong protection for their beneficiaries against creditors, lawsuits, and (in some cases) even divorce settlements. A dynasty trust is a type of irrevocable trust.
Lasts Forever (in Some States): In some states, once a dynasty trust is set up, it can last indefinitely.
Generous Contribution Limits: In 2024, you can put up to $13.61 million per person ($27.22 million for married couples) into a dynasty trust without incurring a gift tax liability. (This assumes you haven’t previously used any of your $13.61 million “lifetime credit” — the total amount of assets you can give to heirs without estate tax.)
Disadvantages of a Dynasty Trust
Complexity and Cost: Setting up a dynasty trust isn’t cheap or simple. You’ll need legal and financial experts to help you create and maintain it, and the costs can add up quickly.
Set in Stone: Because a dynasty trust is an irrevocable trust, once you put money into the structure, the terms are locked in. It’s hard to change them later, which means you lose some flexibility in how the assets are managed or distributed in the future.
Limited Access for Beneficiaries: While the trust can provide for future generations, it might also limit how much your beneficiaries can access at any given time. This can be a downside if they need more funds than the trust allows. (There are ways to plan around this, but that means more legal costs and potentially weaker asset protection.)
Potential for Family Conflicts: Beneficiaries might start to argue over a big pot of money locked away in a trust. You need to have a proper family governance structure to make this work — something that often requires the help of an expert to set up.
Dynasty Trusts in Different States
As mentioned above, what makes a Dynasty Trust what it is comes down to the old English common law Rule Against Perpetuities aka “RAP”. This rule effectively sets how long a trust is allowed to “live.”
By default, it’s 21 years following the death of the last named beneficiary of the trust. But some states have extended that. Here’s a breakdown…
Perpetual Trust States
States that let trusts last indefinitely (i.e. effectively no RAP) include Alaska, Delaware, South Dakota, and Nevada.
Longer-Term but not Indefinite
Some states enforce the Rule Against Perpetuity but only over a very long time. That includes:
Florida: RAP is extended to 360 years.
Arizona, Colorado, Utah: These states have extended the period to 500 or 1,000 years.
Illinois: Allows trusts to exist for 365 years.
Texas: Trusts can last up to 300 years.
States with Opt-Out Provisions
Some states — Pennsylvania, North Carolina, and Maryland — allow the person setting up the trust (the “grantor” or “settlor”) to opt-out of RAP by saying so in the trust document that governs how the structure works.
States that Follow the RAP
The rest of the states, including California and New York, follow the traditional RAP. This effectively limits the life of trusts to 21 years following the death of the last-named beneficiary.
That said, residents of these states can still create a Dynasty Trust in another state that either has abolished or amended the RAP.
Frequently Asked Questions
What are the main benefits of a dynasty trust?
The biggest benefit of a dynasty trust is that it allows you to pass down and build wealth through generations free of estate and gift taxes. Like any irrevocable trust, it helps protect your assets from creditors. It’s a way to ensure your family’s financial security for a long time.
Who pays taxes on a dynasty trust?
Most of the time, the person setting up the trust does so with after-tax money. But assuming it’s done properly and up to certain limits, once the assets are in there, there will be no more estate or gift tax.
Depending on the type of assets held, tax will need to be paid as the trust realizes a return. But there are still a number of planning options to legally reduce tax on those assets.
And beneficiaries will have to pay tax on any money they get from the trust. The rate will depend on the type of income made (ordinary income vs dividends vs capital gains).
How much wealth should I have to consider a dynasty trust?
Dynasty trusts are usually a good fit for individuals or families with a fair bit of wealth, typically starting around $10 million to $20 million or more. That’s because setting up and maintaining a dynasty trust comes with considerable costs, including legal fees, trustee fees, and other administrative expenses. The trust needs to be large enough to benefit multiple generations and justify these costs.
If you don’t have this much but are still interested, get in touch with us to see if other estate planning options might be able to give you most of what you want without the higher fees. Feel free to book in a free, no-obligation consultation to explore further.
How long does a dynasty trust last?
A dynasty trust can last for a really long time, but how long depends on where you set it up. In some states, dynasty trusts can go on indefinitely. These states have gotten rid of the old Rule Against Perpetuities that set how long a trust could exist.
In other states that still follow the traditional rules, a dynasty trust won’t last quite as long. It’s usually limited to 21 years after the death of the last named beneficiary. So, we’re talking about a trust that could last around 90 to 120 years—not forever, but still a pretty long time.
How does a dynasty trust work?
A dynasty trust works by allowing you to pass wealth down through your family for generations, all while minimizing taxes and protecting the assets.
Here’s how it typically goes:
You set up the trust, transferring assets like cash, investments, or property into it. Once the trust is funded, it’s managed by a trustee—this could be a person, a bank, or a trust company—who follows the rules you’ve set for how the money should be used.
The trust is designed to last for a long time and potentially forever in some states. This means the assets can grow and benefit your family for generations. The key thing is that the money stays in the trust, which helps avoid estate taxes and other transfer taxes as it passes from one generation to the next.
Beneficiaries, like your kids, grandkids, and beyond, can receive income or even access the core holdings under the conditions you set, but the main goal is to keep the wealth intact over time.
How do beneficiaries access funds in a dynasty trust?
A dynasty trust can give your beneficiaries access to funds, but it’s usually done in a controlled way. Since the main goal of a dynasty trust is to preserve wealth across generations, the trust’s terms often set specific rules for how and when beneficiaries can access the money.
For example, the trust might let beneficiaries receive income from the trust or access the principal under certain conditions, like reaching a certain age or achieving specific milestones. This setup helps protect the assets from being spent too quickly or from being lost to things like creditors or divorce.
How often do the annual contribution limits for dynasty trusts change?
The contribution limits for dynasty trusts aren’t set in stone—they’re tied to the federal gift and estate tax exemptions.
In 2024, each person can put up to $13.61 million per person ($27.22 million for married couples) into a dynasty trust over their lifetime without triggering gift taxes. This assumes they haven’t previously used any of this $13.61 million exemption in prior years. However, these limits are only temporary. Unless Congress takes action, these limits will drop by about half after 2025. Estate tax on non-exempted assets is generally 40%.
How much does it cost to set up and maintain a dynasty trust?
The cost to set up and maintain a dynasty trust depends on things like the complexity of the trust, the state where it’s established, and the professionals that manage it.
- Setup Costs: To get a dynasty trust up and running, you’re usually looking at legal fees that can range from $10,000 to $25,000 or more, depending on the complexity of the trust and the expertise of the attorney.
- Maintenance Costs: Once the trust is set up, there are ongoing costs. This includes trustee fees, which are often a percentage of the trust’s assets (typically around 0.5%-2% each year, with larger sums under management usually meaning lower fees), as well as administrative and accounting fees. These expenses can add up to several thousand dollars each year.
In short, while the exact cost depends on your specific needs, setting up and maintaining a dynasty trust is a significant financial commitment, so it’s usually a good fit for those with considerable wealth.
Is a Dynasty Trust right for you?
A key part of our approach is that proper wealth protection planning is not about buying the tool; it’s about finding the best solution to help you reach your asset protection, privacy, and investment goals.
Building such plans is what we’ve done since 1984. We can do the same for you. Simply book a free, no-obligation call with one of our Associates to see if our planning is right for you.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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