Dynasty Trust Defined
A Dynasty Trust, often known as a perpetual trust, is a form of trust that can last for several generations.
It is a significant wealth transfer vehicle because it permits wealth to pass from generation to generation providing asset protection without being subject to transfer taxes such as gift, estate, or generation-skipping transfer tax.
The trust is irrevocable with no predetermined expiration date; it lasts as long as assets are held in it.
Once a dynasty trust is financed, the terms cannot be changed, even by the beneficiaries.
As a result, it is necessary to build a trust with caution. An option for a more relaxed generation wealth plan is to appoint one beneficiary as a trustee.
How a Dynasty Trust Works
A Dynasty Trust can hold assets such as cash, stocks, real estate, and other investments.
It is irrevocable, which means it cannot be amended or canceled. The grantor has the authority to establish trust regulations, no matter how rigorous or loose those restrictions are.
A financed trust’s conditions cannot be modified. The trust's beneficiaries are also unable to amend the conditions; thus, it is critical the dynasty trust is set up wisely.
Typically, the grantor's children are the dynasty trust's immediate beneficiaries (the person whose assets are used to create the trust).
The grantor's grandchildren or great-grandchildren often become the beneficiaries following the passing of the last child.
A trustee that the grantor appoints is in charge of managing the trust's activities. Usually, a bank or another financial institution serves as the trustee.
A trustee may distribute funds from the trust to beneficiaries following the conditions of the trust.
Beneficiaries, however, will not be included in their taxable estates since they cannot manage the trust's assets. Similarly, because the assets belong to the trust rather than the beneficiary, they are safe from claims by the recipient's creditors.
However, a dynasty trust is still liable to income tax. Individuals commonly transfer assets to dynasty trusts that do not generate taxable income to lower their income tax burdens, such as non-dividend-producing shares and tax-free municipal bonds.
Legacy Trust vs. Dynasty Trust
The terms legacy trust and dynasty trust are interchangeable and have the same meaning. These expressions refer to the goal of passing a legacy or fortune from generation to generation.
"Dynasty" refers to a country's lengthy history of kings. This helps clarify the idea of transferring the torch from generation to generation without pausing.
Traditional trusts often specify one or more beneficiaries and then terminate the trust. A new group of beneficiaries is assigned to a dynasty trust each passing generation.
Who Would Benefit from a Dynasty Trust?
A dynasty trust may be a good choice for someone with considerable assets that they want to pass on not only to their children but to their children's children. Dynasty trusts are meant for long-term generational wealth planning.
It is important to make sure the grantor resides in a state that permits dynasty trusts. If the grantor lives in one of the states still implementing the Rule Against Perpetuities, a dynasty trust may not be an option.
States that Allow Dynasty Trust
Here is a list of States that allow Dynasty Trusts:
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Alaska
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Delaware
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District of Columbia
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Hawaii
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Idaho
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Illinois
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Kentucky
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Maine
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Maryland
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Michigan
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Missouri
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Nebraska
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New Hampshire
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New Jersey
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North Carolina
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Ohio
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Pennsylvania
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Rhode Island
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South Dakota
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Virginia
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Wisconsin
Setting Up A Dynasty Trust
Specific steps need to be followed in order to set up a Dynasty Trust.
The first step is to consult with an attorney specializing in trusts and estate planning. A lawyer will help choose the right trust for the individual’s circumstances and draw up the necessary paperwork.
The second is to name a trustee and beneficiary. The trustee is the person or organization that will manage the trust. A successor trustee will also need to be named in case the original trustee dies, resigns, becomes incapacitated, or is otherwise unable to serve.
It’s necessary to name the trust's beneficiaries, which can include children, grandchildren, and future generations.
Third, decide what assets to include in the trust. Cash, investments, real estate, life insurance policies, and other assets to the trust can all be transferred.
Fourth, determine how assets will be distributed to beneficiaries. A grantor can specify how and when assets will be distributed or give the trustee discretion to decide when and how to distribute assets.
The fifth is to fund the trust. Ownership of assets needs to be transferred into the trust. This can be done by changing the property title or by transferring cash or investments into the trust.
Benefits of a Dynasty Trust
Dynasty trusts offer several benefits, including:
Generation-Skipping Transfer Tax (GST) Exemption
Dynasty trusts can help minimize or avoid the generation-skipping transfer tax (GST). This federal tax is imposed on property transfers to beneficiaries two or more generations below the grantor.
The GST exemption allows the grantor to exempt a certain amount of money from the tax. A Dynasty Trust can shelter assets from the GST tax and allow beneficiaries to use the exemption when they inherit the trust assets.
Asset Protection
Dynasty trusts can also provide asset protection for beneficiaries. A Dynasty Trust can specify how and when assets will be distributed to beneficiaries. This gives the ability to protect heirs from creditors or lawsuits.
For example, a trust could specify that assets will only be distributed after a beneficiary reaches a certain age or after graduating from college. It can determine that assets will only be distributed if a beneficiary is married or has children.
Tax Advantages
Dynasty trusts can also offer tax advantages. Dynasty Trusts are exempt from federal estate and gift taxes. This means that beneficiaries can inherit the trust assets without paying federal estate or gift taxes.
In addition, Dynasty Trusts can help minimize or avoid state estate taxes.
Limitations of a Dynasty Trust
Dynasty trusts also have some limitations, including:
No Flexibility
A trust with a defined duration provides simple modifications to the terms to reflect changing circumstances. Flexibility is lacking in dynasty trusts, which usually last for many generations after the grantor dies.
As a result, a grantor’s ultimate ambitions and desires may not be realized in the long term. Unlike other trusts, it is not possible to quickly amend the parameters of the agreement to suit changing circumstances.
Cost and Complexity
Dynasty trusts are generally more expensive to set up and maintain than other types of trusts. Dynasty trusts also tend to be more complex, making them more challenging to administer.
In addition, dynasty trusts may be subject to estate taxes in some states. Dynasty trust assets may also be subject to probate in some states.
Long-Term Fiduciary Responsibilities
Dynasty trusts are long-term commitments. If someone is named as a trustee, they will be responsible for managing the trust for many years.
Lack of Outright Distributions to Your Heirs
Finally, if a grantor opts to establish a dynasty trust, all of the intended beneficiaries will not get traditional inheritance under this trust.
This is because trustees must adhere to the trust's distribution guidelines. This might irritate recipients who believe they should get an inheritance after death.
Final Thoughts
A dynasty trust can be a good choice for someone with considerable assets they want to pass on to future generations.
Dynasty trusts offer asset protection, tax advantages, and flexibility, but they also have some limitations. If considering setting up a dynasty trust, consult with an attorney specializing in trusts and estate planning.
FAQs
1. What is a Dynasty Trust?
A Dynasty Trust is a trust that can last for many generations after a grantor dies. Dynasty trusts offer asset protection, tax advantages, and flexibility, but they also have some limitations.
2. How does a Dynasty Trust work?
A Dynasty Trust works by controlling how assets are managed and distributed. It can specify how and when assets will be distributed or give the trustee discretion to decide when and how to distribute assets.
3. Who would benefit from a Dynasty Trust?
People with considerable assets that they want to pass on to future generations would benefit from a Dynasty Trust. Dynasty trusts offer asset protection, tax advantages, and flexibility.
4. How do I set up a Dynasty Trust?
You can set up a Dynasty Trust by working with an attorney specializing in trusts and estate planning.
5. What are the limitations of a Dynasty Trust?
The limitations of a Dynasty Trust include the lack of flexibility, the cost and complexity, long-term fiduciary responsibilities, and the lack of outright distributions to heirs.
