There are a variety of estate planning tools that are designed to help you meet your goals. For instance, you might start with a basic estate plan with a Will and a Trust to cover yourself and your immediate family in case something were to happen. As time goes on, you might take advantage of sophisticated measures such as an advance directive to provide specific instructions about your medical care.
In this guide, we’re going to talk about one such sophisticated estate planning tool: the perpetual trust. Keep reading to find out what this type of Trust does, and how it works. We’ll also answer many of the questions you’ll be sure to have.
What is a Perpetual Trust?
A perpetual trust is a type of trust that is used to pass down property from generation to generation. In theory, a perpetual trust could pass down wealth from beneficiary to beneficiary for over one hundred years.
Families who use perpetual trusts often do so to keep their estates outside of the probate process. This helps reduce the time and resources that often get taken away from beneficiaries in their efforts to inherit their assets. That way, families can have more assurance that their hard-earned legacies will benefit future generations for as long as possible. In other words, it’s a powerful wealth transfer tool.
Note that perpetual trusts are also often called dynasty trusts; the two terms are used interchangeably.
How Does a Perpetual Trust Work?
Unlike most other types of Trusts, perpetual trusts are designed to operate indefinitely. An individual could place their assets into a perpetual trust, and then name certain conditions and restrictions for how the money should be passed down and distributed. They can also get specific about any circumstances that would change the rules that they’ve set, and how.
Once the individual passes away, the terms of the perpetual trust go into effect. Assets are distributed to named beneficiaries per the rules and conditions of the trust. Most often, a perpetual trust is designed such that the assets won’t be distributed in entirety. For example, the Trust may designate that only the dividends earned off of interest-bearing assets should be distributed, etc. That way, benefits can be provided to many generations down the line, as long as the assets held within the Trust continue to perform. This could be a great reason to assign the Trust to a Trustee who has professional experience in this area, such as an investment and asset management firm.
Note that the Trust does not necessarily have to make distributions either. The Trustor (the person who set up the Trust) can create a rule such that distributions are not made if the named beneficiary in question is going through turbulent times. The Trustee would be tasked with making these decisions based on the provided set of rules.
Is a Perpetual Trust Irrevocable or Revocable?
A perpetual trust is irrevocable. Once the Trust has been set up, and assets have been transferred into the Trust, then the Trustor cannot change their mind. Therefore, an individual setting up a perpetual trust should be careful not to use any property they might need during their lifetime to fund the Trust.
That being said, this doesn’t mean that the Trust itself can’t be flexible. The Trust can be set up in a way such that the Trustee has the power to make decisions on how the assets should be managed and distributed.
Because a perpetual trust is irrevocable, Trustors should be absolutely sure that it’s the right estate planning tool for them before they commit to setting one up and funding it.
Which States Allow Perpetual Trusts?
Anyone interested in setting up a perpetual trust should know that it may or may not be allowed in certain states. This is due to the 21-year Rule Against Perpetuities. The states that follow this rule do not allow perpetual trusts. We’ll expand upon the legality of perpetual and dynasty trusts in the next section.
For now, note that the top states for perpetual trusts are Alaska, Delaware, Nevada, and South Dakota. These states all allow perpetual trusts and don’t assess state income taxes on these trusts.
Here are all of the U.S. states that allow perpetual trusts:
District of Columbia
In contrast, here are the states that have constitutionally disallowed perpetual trusts, citing the rule of perpetuity:
The remaining states allow perpetual trusts, but only up to a certain number of years. They’ve done this by opting out of the Rule Against Perpetuities, or making a change to the rule. For example, they will allow the Trust to exist for anywhere between 150 and 1,000 years after the death of the last-named beneficiary.
Are Perpetual Trusts Illegal?
In the previous section, you may have picked up on the sense that the constitutional stance on the legality of perpetual trusts differs from state to state. While they are not illegal, per se, they have been disallowed in several states.
Perpetual trusts are a bit controversial because there is one school of thought that it’s a tool used strictly by wealthy families to hold property in a Trust “forever” without having to be taxed. Thus, many states abide by the Rule Against Perpetuities, which basically states that a Trust cannot exist after 21 years after the death of the last-named beneficiary who was alive at the time of the Trust creation.
However, perpetual trusts don’t always have to be used only by the wealthy, and as a scheme to avoid taxes forever. Any family can make use of a perpetual trust and benefit from it, as long as it is allowed in their state. It can merely be a tool to help provide modest financial support for more than one generation, such as their children, grandchildren, and their grandchildren’s children.
In summary, perpetual trusts are not illegal. Just be sure to double-check that it is allowed in your state.
Is a Perpetual Trust Right for You?
Although creating a perpetual trust used to be tricky, more and more states have either repealed or made changes to the Rule Against Perpetuities that make it possible to create a perpetual trust. Some states put a cap on how long a Trust can exist. Although it’s not forever, a perpetual Trust can often benefit future generations for hundreds of years down the line.
Now that at least 22 states allow perpetual trusts in full, and several more in some capacity, you should consider using them as a tool to build your legacy.
First, find out whether or not you live in a perpetual trust state. That would be a practical first step. Then, get clear on your financial goals. Are you merely interested in planning for your own life, and then perhaps your partner’s life and your children's life? Then perhaps a perpetual trust isn’t necessary.
In contrast, are you passionate about building wealth in such a way that can be handed down for many generations to come? Would you like to avoid estate tax, and protect your legacy from probate fees, creditors, bankruptcies? Are you worried about how distributions might be abused by future generations who might deal with behavioral issues or substance abuse? These are all practical reasons for which a perpetual trust could be a great tool. It can help protect your assets so that they can be managed and distributed by a Trustee in a way that would contribute to your family’s wealth and well-being, rather than having it whittled away by chance and bad judgement.
That’s one of the best things about a perpetual trust; it allows you to set it up in a way that gives you the greatest level of control about how you wish for your legacy to last and benefit loved ones.
Create Your Trust Today
Perpetual trusts, or dynasty trusts, are a powerful estate planning tool that can be used by those who have the primary objective of making their legacy last for many generations, and not just the generation that directly follows them. A perpetual trust can shelter your hard-earned assets from estate taxes, probate fees, and the other strain many beneficiaries encounter when trying to claim their rightful inheritances. Although many states have repealed the Rule Against Perpetuities, just be sure that perpetual trusts are allowed in the state that you live in.
Finally, be extra sure that a perpetual trust is the right option for you. Although powerful, they are irrevocable, meaning that you can make changes once you set up and fund the Trust. Once you do, however, you can have a sense of peace and pride knowing that you’ve done something amazing for your legacy and your family members for many, many years down your own bloodline. How cool would that be? Pretty cool, if you ask us!
Would you like to set up a perpetual Trust? Whether you’re interested in this specific type of Trust, or are interested in exploring different types of Trusts, we’ve got your back. Our online Trust creation service provides support so that you can choose the best type of Trust for your unique goals and circumstances, and receive support throughout the Trust creation process! Setting up your Trust with Trust & Will couldn’t get any easier.
This guide specifically discussed the perpetual (aka dynasty) Trust. However, know that there are many other types of estate planning tools out there! We are happy to guide you.
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