If you’ve been wondering how you might be able to pass down wealth for several generations, and not just your own children, you might find that a dynasty trust is just the solution you were looking for. In this guide, we’ll go over everything you need to know about the family dynasty trust, including answers to the most popular questions.
What is a Dynasty Trust?
A dynasty trust, or perpetual trust, is a type of trust that is designed to pass on wealth from generation to generation in a tax-advantaged environment. Families can avoid being subject to gift tax, estate tax, and generation-skipping transfer tax as long as the assets remain in the trust.
The key difference between a dynasty trust and a traditional trust is time. With a dynasty trust, you can in theory pass down wealth for an unlimited amount of time.
What is the Main Benefit of a Dynasty Trust?
The main benefit of a dynasty trust is that it offers tax advantages. As a result of the 2017 Tax Cuts and Jobs Act, the federal estate tax exemption is $11.58 million. This means that you can place up to $11.58 million into a dynasty trust without facing estate taxes, gift taxes, or generation-skipping transfer tax. When set up properly, you can protect the generational wealth you created long after you’ve gone.
Second, a dynasty trust allows you to protect assets for a long duration of time. Because the assets are owned by the trust, and not by the beneficiaries, the assets are not included in their taxable estates. This means that creditors and divorce courts cannot go after the assets held by the trust.
How Does a Dynasty Trust Work?
The Rule Against Perpetuities was a law that originally gave trusts a shelf life. It was common practice for trusts to terminate 21 years after the passing of a trustor’s last beneficiary. Over time, many states either extended the time limitation or eliminated the rule completely. Now, you can create dynasty trusts in any of these states.
A dynasty trust is an irrevocable trust, which means that it cannot be changed or revoked. As the grantor, you have the autonomy to set rules for the trust — no matter how strict or lax you might want those rules to be.
Once you’ve funded the trust, its terms can no longer be changed. The trust’s beneficiaries cannot change the terms either, so it is imperative that you set up your dynasty trust very carefully.
If you have a lax approach to generational wealth planning, you can appoint a beneficiary to serve as their own trustee. However, most trustors typically appoint a bank or other financial institution as the trustee of their dynasty trusts. This trustee is responsible for managing and distributing the assets held in the trust per the outlined terms. After the last beneficiary passes away, the next generation of children assume the beneficiary role, and so on and so forth.
Legacy Trust vs Dynasty Trust - What’s the Difference?
A legacy trust and a dynasty trust share the same meaning, and are used interchangeably. Both of these terms describe the objective of passing on your legacy, or your wealth, from generation to generation.
The term “dynasty” describes a long lineage of rulers in a country. This helps explain the concept of passing the torch from one generation to the next, without any breaks. Traditional trusts typically name one or more beneficiaries, after which the trust terminates. In the case of a dynasty trust, a new group of beneficiaries is appointed with each passing generation.
Other Commonly Asked Questions About Dynasty Trusts
Because dynasty trusts are so unique in nature, you’re sure to have plenty of follow-up questions. We gathered some of the internet’s most burning questions about dynasty trusts; see our answers below!
Who Should Consider a Dynasty Trust?
A dynasty trust has the potential to serve as a great fit for anyone with significant assets that they would like to pass on not only to their children, but their children’s children, and so on. Dynasty trusts are designed for long-term generational wealth planning.
You should also ensure that you live in one of the states that allow dynasty trusts, which we will reveal momentarily. A dynasty trust may not be an option if you live in one of the states that still enforce the Rule Against Perpetuities.
How Long Can Dynasty Trust Last?
Before states began to do away with the Rule Against Perpetuities, trusts could only last up to 21 years after the death of the last beneficiary. However, many states are doing away with this rule in its entirety.
For example, a dynasty trust can last up to 365 years in Nevada, and 90 years in California. The duration of time varies from state to state.
What States Allow Dynasty Trusts?
If you’ve been at the edge of your seat wondering if you live in a state that allows dynasty trusts, here’s the moment you’ve been waiting for.
Here are the 21 states that eliminated the Rule Against Perpetuities and allow dynasty trusts:
Alaska
Delaware
District of Columbia
Hawaii
Idaho
Illinois
Kentucky
Maine
Maryland
Michigan
Missouri
Nebraska
New Hampshire
New Jersey
North Carolina
Ohio
Pennsylvania
Rhode Island
South Dakota
Virginia
Wisconsin
How Much Does It Cost to Set Up a Dynasty Trust?
The cost to set up a dynasty trust will vary based on your personal circumstances. Affordable Life USA estimates that it could cost anywhere from $3,000 to $30,000 to set up your dynasty trust. Contributing factors include estate planning attorney fees, complexity of the terms of the trust, and the size of your estate.
That being said, using a trusted online estate planning service can be much more affordable. At Trust & Will, you can create a Trust online today!
Is a Dynasty Trust a Good Idea?
A dynasty trust is a great option for families that are seeking to transfer wealth from generation to generation. If you have a sizable estate and wish to transfer wealth without triggering certain estate-planning taxes, a dynasty trust could be a great option. As a reminder, dynasty trusts are irrevocable. This means that once you’ve set the terms of the trust, you won’t be able to make any amendments. Therefore, dynasty trusts may not be a good fit if changing family dynamics or asset structures could affect your plans for the future.
Create Your Dynasty Trust Today
The word “dynasty” evokes the imagery of a long-lasting royal bloodline. Royal or not, every family deserves to pass on their hard-earned legacy to future generations. If you live in one of the 21 states that eliminated the Rule Against Perpetuities, a dynasty trust is certainly something to consider. If you don’t feel sure, it’s always a good idea to consult an estate planning expert. Trust & Will is here to help you navigate your box of estate planning tools and help you pick the best option for you and your family.
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