A dynasty trust is a type of long-term trust created to pass wealth down to multiple generations. The main advantage of a dynasty trust is that it can avoid transfer taxes, like the estate tax, gift tax, and generation-skipping transfer tax (GSTT). Individuals choose to create dynasty trusts to pass on their wealth for many generations. If the trust is properly set up, then multiple generations of beneficiaries can reap the benefits.
Dynasty trusts are irrevocable, which means their terms cannot be changed once the trust has been funded. In some instances, the terms can be adjusted slightly, but only in very specific circumstances and by a specific individual. If you are interested in creating a dynasty trust or want to learn more about how they could benefit your estate, our attorneys can help. Contact our office for a free consultation by calling 510-901-5375.
How Does a Dynasty Trust Work?
Most trusts have a rule that they can only last a certain number of years before expiring. States created these rules to avoid perpetuities and abolish trusts that can last for decades or span multiple generations. Historically, trusts could only continue for 21 years after the death of the last beneficiary alive who was named when the trust was created. Under this rule, a trust could only last for about 100 years.
In recent years, however, many states have done away with these regulations. Without a set expiration date for trusts, individuals can create dynasty trusts to pass their wealth on to their children, grandchildren, great-grandchildren, and beyond.
A dynasty trust is created by a grantor who sets the rules for how the money will be managed and distributed. After the chosen assets have been moved into the trust, the grantor cannot add assets, remove assets, or change assets. Grantors also cannot adjust the trust’s terms or revoke the trust at any time. This is because a dynasty trust is an irrevocable trust. Similarly, the trust’s future beneficiaries cannot adjust or amend the terms.
When the trust is established, the grantor will name beneficiaries to receive funds from the trust. Typically, the immediate beneficiaries are the grantor’s children. After the grantor’s final child dies, the grantor’s grandchildren or great-grandchildren will take over as beneficiaries and receive funds. All operations are controlled by a trustee that the grantor names. Since dynasty trusts are made to span multiple generations, the trustee is often a bank or financial institution rather than an individual.
Can a Dynasty Trust be Modified?
Dynasty trusts are irrevocable, meaning they cannot be modified or changed by the grantor or beneficiaries after the trust is established. However, if you are concerned about modifications being needed in the future, you can assign a trust protector to watch over the terms of the trust. A trust protector is an optional role that gives power to a third-party individual without a vested interest in the trust. The trust protector has power over the terms of the trust, but they are not the trustee, meaning they do not manage assets or distribute assets to beneficiaries.
Not all trusts have trust protectors, as they are an optional role that individuals can choose to assign. If you would like to add a trust protector to oversee your trust, you must work with an estate planning attorney to add a trust protector clause to the terms of your dynasty trust. In this clause, you will grant the trust protector certain powers over the trust, including modification of the terms. Essentially, the trust protector will act in place of the grantor, but they will have the power to modify the terms of the irrevocable trust.
If you have assigned a trust protector, that protector can replace a trustee or modify the terms of the trust in extreme circumstances. For a trust protector’s powers to be triggered, someone involved in the trust, like a beneficiary, must request that they take action. The beneficiary can ask the trust protector to amend the trust, and the trust protector can use their powers if they believe it is in the trust’s best interest.
What Are the Main Benefits of a Dynasty Trust?
While the main purpose of a dynasty trust is to pass wealth down for generations, one of the main benefits is that it avoids being taxed while doing so. If individuals include assets in a dynasty trust below the federal estate tax exemption limit, then the trust will be exempt from estate taxes, generation-skipping taxes, and gift taxes. The federal estate tax exemption changes yearly but has grown to over $12 million. This means that any trust worth less than $12 million will not be subject to these taxes.
Similarly, because the grantor no longer owns the assets in a dynasty trust, those assets are not included in the grantor’s estate. When the estate is valued at a lower value, it is taxed less, which can reduce the overall tax liability. Creditors and divorce courts also cannot seek the assets held in a dynasty trust.
Can an Estate Planning Lawyer Help Me?
Passing on your legacy to your children is important, but it doesn’t have to stop there. With a dynasty trust, you can pass on your wealth to your grandchildren and even your great-grandchildren until the funds run out. With the help of an estate planning lawyer on our team, you can create a dynasty trust with terms that are right for you and your family to provide financial security for decades to come. Our team at The Singh Law Firm would be happy to review your financial goals and help you decide whether a dynasty trust is right for you. For more information, call us today at 510-901-5375.