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Dynasty Trust: A Tax-Efficient Way to Pass Wealth Down
- November 2nd, 2023
If you want to pass money to future generations without having it subject to gift and estate taxes, then a dynasty trust may be right for you.
What Is the Benefit of a Dynasty Trust?
Establishing a dynasty trust allows your trust assets to be used for the benefit of multiple generations while keeping the assets out of your taxable estate – and that of your beneficiaries.
The main benefit of this type of long-term trust is the avoidance of estate and gift taxes over many generations.
Families with significant wealth may benefit most from avoiding estate and gift taxes.
More Information on Estate and Gift Taxes
Note that in 2023, the federal estate tax exemption is $12.92 million ($25.84 million for married couples). Estates valued at more than the exemption amount will pay federal estate taxes, at a rate of between 18 percent and 40 percent.
The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.92 million in 2023. Note that you can give any number of people up to $17,000 each per year (in 2023) without the gifts counting against the lifetime limit.
Meanwhile, the generation skipping transfer (GST) tax affects assets passed to grandchildren. This tax is imposed even when property is left in trust for a grandchild. The GST exemption is the same as the estate and gift tax exemptions. So, if you transfer more than the GST exemption, the tax rate is 40 percent.
Additional Benefits of Dynasty Trusts
Assets transferred to a dynasty trust are subject to estate, gift ,and GST taxes only when initially transferred and only if they exceed federal exemption thresholds.
While estate and gift tax exemptions are currently very high, in 2026 the exemption is set to drop to the previous exemption amount of $5.49 million (adjusted for inflation).
Another benefit of a dynasty trust is that the assets in the trust are protected from the beneficiaries’ creditors or in the event a beneficiary divorces. If the trust is properly structured, creditors cannot go after trust assets to pay the beneficiaries’ debts.
How a Dynasty Trust Works
A dynasty trust is an irrevocable trust, which means once it is created, it can't be changed. Funds transferred into the trust will be taxed if they exceed the lifetime gift tax exclusion.
However, once funds are transferred to the trust, beneficiaries of the trust can pass assets to the next generation without those assets being subject to estate, GST, or gift taxes. In addition, the assets placed in the trust are removed from your estate and can grow outside of it.
The trust’s trustee – that is, the person or institution appointed to manage the trust – can be a beneficiary. However, because the trust is designed to last for generations, it may make more sense to have a professional fiduciary, such as a bank or other financial institution, serve as trustee. The trustee manages and distributes the assets in the way you set forth in the trust agreement.
Usually, the trust provides for the beneficiaries’ support during their lifetimes. For example, it could direct the trustee to pay out income regularly, make periodic principal distributions, or make distributions contingent on the beneficiary’s need.
How Long Can a Dynasty Trust Exist?
The length of time the dynasty trust can continue to exist depends on state law. Some states allow trusts to run for hundreds of years or indefinitely. Others place limits on how long the trust can operate.
Traditionally, the rule against perpetuities states that a trust can last 21 years past the death of the last beneficiary. However, many states have opted out of the rule, allowing trusts to continue for many generations.
What Are the Disadvantages of a Dynasty Trust?
The downside of dynasty trusts is that they are inflexible. Once the trust is created, you lose access to the assets.
Because dynasty trusts are meant to last for generations, they also require considerable guesswork about what will be best for your descendants.
How to Set Up a Dynasty Trust
Dynasty trusts are complicated instruments that must be designed correctly in order to provide benefits.
Find a qualified professional in your area to determine whether a dynasty trust is right for you; they can guide you through drafting the trust document properly, designating your beneficiaries, and outlining how the trust will work.
To learn more, be sure to check out the following related articles:
- Understanding the Common Types of Trusts
- How Your Estate Is Taxed, or Not
- IRS Raising Annual Gift Tax and Estate Tax Exclusions in 2023
Created date: 06/23/2022