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How Does a Dynasty Trust Work?

If you are interested in long-term wealth planning, you may have heard of a dynasty trust. A dynasty trust is an irrevocable trust that can extend between generations. Typically, a grantor will transfer wealth into a dynasty trust to create it. Once the grantor dies, the trust is divided into sub-trusts, and each one supports a single beneficiary (typically the grantor’s children). When a beneficiary dies, those sub-trusts are again divided into more separate trusts to benefit the grantor’s grandchildren. This trust can continue for multiple generations until the principal runs out and the trust no longer contains any monetary value.

The state you are in limits how long a dynasty trust can exist. In California, the trust can exist for 21 years after the death of the last person who was alive and named when the trust was created. For instance, if a grantor establishes a dynasty trust and names their newborn grandchild, then a dynasty trust could continue for decades or even over a century. If you are interested in creating a dynasty trust to unlock generational wealth, contact our law office today at 510-901-5375 for more information.

How is a Dynasty Trust Created?

You can create a dynasty trust with the help of an attorney on our team. The process for creating a dynasty trust varies from state to state but generally follows similar steps.

Below are the main steps to creating a dynasty trust:

  • Drafting the trust agreement. First, you will meet with an estate planning attorney on our team to talk about your financial goals for the future. We will advise you on whether a dynasty trust is suitable for you before drafting the agreement.

  • Funding the trust. You can include almost any assets in a dynasty trust. Most trusts contain life insurance, real estate, securities, and business interests. Depending on the amount you would like to include in the trust, you may have to pay gift taxes if you are over the tax exemption limit.

  • Naming beneficiaries. You can name specific beneficiaries like your children and grandchildren, or you can name unspecified beneficiaries who have not been born yet, like your children’s future children.

  • Determining how the funds will be distributed. You can outline circumstances and situations in which you can control the trust and distribution of funds. Because dynasty trusts are irrevocable, meaning they cannot be changed after creation, determining this is essential.

What Are the Main Benefits of a Dynasty Trust?

There are many benefits to a dynasty trust, one of which is ensuring that your wealth gets passed on to generations beyond your children. Many individuals want their legacy to help their grandchildren and even their great-grandchildren, which is made possible by this particular type of trust.

Beyond the obvious, there are other benefits to creating a dynasty trust that may be enticing to you:

  • Protection from creditors. Because a dynasty trust is irrevocable, it is technically no longer part of your estate. This means that any creditors who attempt to get money from your estate cannot take it from the dynasty trust. Plus, our team can also draft the trust to include protection from your beneficiaries’ creditors.

  • Lowers your tax liability. You can fund your dynasty trust using your lifetime gift tax exemption. By doing this, the assets in the trust will not be subject to gift or estate tax at the time of your death.

What Are the Limitations of a Dynasty Trust?

There are very few limitations to a dynasty trust, and the grantor generally has the ability to specify which funds are removed by which beneficiaries. However, it is important to understand that beneficiaries will not have the ability to change or adjust the terms of the dynasty trust even if their circumstances change in the future. For instance, if your grandchild loses their job and needs a large sum of money at once, they may not be able to access the funds in the trust if you have them set up on monthly payments.

Similarly, dynasty trusts are irrevocable, meaning you lose control of the assets within them once the trust is created. Because the trust is intended to outlive you and your family members, many individuals assign a financial institution or corporation as a trustee to manage those assets.

Are Dynasty Trusts Subject to Income Tax?

A dynasty trust can be created as a grantor trust or a non-grantor trust. If you create a grantor trust, any income generated by the trust is subject to income tax and must be paid by the grantor. For a non-grantor trust, any income generated by the grantor is still taxable, but those taxes are due via IRS form 1041. This form is separate from the grantor’s income tax.

Any income a beneficiary receives from the fund is reported as their personal income and is subject to income tax. Under federal law, trusts reach the highest income tax bracket at much lower income levels than individuals. If you are concerned about paying taxes on a dynasty trust now or in the future, contact our legal team today for more information.

Do I Need to Consult a Trust Lawyer?

Creating a dynasty trust is an excellent way to preserve generational wealth and pass your legacy down to generations beyond just your children. While dynasty trusts are good options for many people, creating your own unique trust with the help of a trust lawyer is the best way to maximize your wealth and protect your family for generations to come. If you would like to learn more about dynasty trusts, contact The Singh Law Firm for a free consultation by calling 510-901-5375.


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