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Advanced Estate Planning

Dynasty Trusts

Dynasty Trusts also referred to as Legacy Trusts are an instrument that have been used by the wealthy to preserve the wealth and legacy of family assets for generations upon generations. Most of the high net worth families from the late 1800’s to early 1900’s enjoyed the benefits of the Dynasty Trust. It is also well known that the Kennedy’s are still enjoying the benefits of the Dynasty Trusts established generations ago.

So what is it, how does it work and who really benefits by it?

A Dynasty Trust is an Irrevocable Trust used to pass wealth and assets to descendants of the person establishing the Trust. The trust does not leave assets to a spouse or the immediate children, but to grand-children, and in the past it was left to great-grand-children and so on, and so on. Essentially, a Grantor could leave a substantial estate to children multiple generations down the road.

This process went on for many years and an extreme amount of wealth was passed on tax free. Soon enough, the government cracked down on these types of vehicles and enacted a tax law called the Generation Skipping Tax. In essence, the Government wised up when the Kennedy’s and other wealthy families were transferring their enormous wealth for generations, inheritance tax free. So, these trusts can no longer go on for generations and generation, and the government has hedged themselves to ultimately get paid.

However, the government has also provided for the gift tax exclusion. The amount varies. It seems as though the exclusion amount changes when the Presidency administration changes. Currently there is a $5,450,000.00 (adjusted to inflation) gift tax exclusion which means that you can gift away in your lifetime up to that amount tax-free. After that, you pay a significant percentage in taxes on gifted transfers of wealth. For a married couple, you can double the above number.

Dynasty trust in California
Rule Against Perpetuities

One other item that affects the Dynasty Trust is a complex and convoluted law called the Rule Against Perpetuities. This law limits the number of generations that can be skipped before the Trust must commence distributions. The law puts a time limit on the Trust so that the money cannot be held in trust forever. In brief and as simply put as possible, the Rule provides that the distribution must take place within 21 years after the last remaining beneficiary, alive at the time of the making of the Trust, dies.

As mentioned earlier, your kids do not benefit from the principle of the trust, however receive the income from the trust during their lifetimes. Your grand kids would be deemed the true beneficiaries, thereby receiving the assets in the trust, inheritance tax free.

I have only touched the tip of the iceberg of the complexity and usefulness of this trust. This type of trust is not for everyone and a lot of thought and planning must go into determining whether this trust accomplishes your goals and intent. However, when used, this Trust is extremely powerful, not only for preserving wealth but for its asset protection functionality. If you have not used up your lifetime gift exclusion and you are interested in preserving some family wealth for future generations, I recommend you learn more about the Dynasty Trust.