Oftentimes we talk about estate planning from the perspective of the person setting up their estate; which tools are best for them, how to go about setting them up, and so on and so forth. A less frequent conversation is estate planning from the eyes of the beneficiary, the individual who will be receiving any distributions from a loved one’s estate. For example, this could be a child who inherits some assets out of their parents’ joint Trust account when they reach a certain age.
Data shows us that millennials are creating their own estate plans in record numbers. This suggests that these would-be beneficiaries are increasingly well-informed about estate planning. In turn, they have the golden opportunity to be the person “managing up” with regards to estate planning and their families. In other words, they can help educate their parents and grandparents about estate planning tools and their benefits. Not only can they persuade them to set up estate plans for everyone’s benefit, they can self-advocate on estate planning structures that would benefit them most as beneficiaries.
In this guide, we’ll be talking about dynasty trusts. Keep reading to find out what they are, and how they can benefit or detract from you as a beneficiary. Then, you can make a decision as to whether or not you want to recommend dynasty trusts to the loved ones in your life.
What is a Dynasty Trust?
First and foremost, let’s get started with a working definition of a dynasty trust.
A dynasty trust, also known as a perpetual trust, is an estate planning tool and type of trust that is often used to pass wealth from generation to generation. Dynasty trusts are different from other types of trusts because the main objective is longevity. In other words, an individual who chooses to set up a dynasty trust typically has a desire to make sure that their legacy lasts several generations.
Pro & Cons of a Dynasty Trust
Before electing to use a dynasty trust, it’s important to understand its potential drawbacks. Of course, you’ll also be interested in the advantages it has to offer.
Families who choose dynasty trusts get to use it as a tool to manage their assets for the benefit of their heirs. When placing assets in a trust, a trustee will have the power to make calls for when a beneficiary should or shouldn’t receive a distribution. They use the terms of the trust as guidance for making these judgement calls. Unlike other Trusts, dynasty trusts don’t have an expiration date with the exception of a few states. This means that a family can provide support to future generations, and not just the immediate generation beneath them.
Lastly, dynasty trusts offer asset protection. First, they help limit taxation, such as estate taxes that are typically assessed each time property changes hands within the family. They also protect assets from creditors or legal claims.
However, there are also some drawbacks that families should be sure to consider. For instance, it can be challenging to select a Trustee of a dynasty trust. This is because your Trust could benefit many generations to come, so you need to make sure you can name a Trustee that provides continuity. Oftentimes, a family will name a professional third party as the Trustee, instead of a spouse or adult child. Trust management firms and banks are common examples.
Second, understand that dynasty trusts can be inflexible. They are irrevocable, meaning that you cannot change the terms once you set up and fund the Trust, even if you have events that change your circumstances.
Finally, be aware that your heirs typically won’t receive a traditional inheritance if you set up a dynasty trust. The terms of dynasty trusts typically specify that distributions should be used for the health, education, and maintenance of beneficiaries. This means that they won’t inherit a lump sum or property outright. Instead, they typically receive distributions in specified amounts. For example, they could receive any returns made off of interest-bearing assets held in the Trust.
This may frustrate beneficiaries who would have liked to receive a traditional inheritance upon your passing.
How Does a Dynasty Trust Work for Beneficiaries?
As the beneficiary of a dynasty trust, you would receive distributions from the trust per the terms set up by the Trustor. This could look different for every individual.
A named Trustee will be in charge of managing the assets held in the Trust, and making these distributions to you. Know that you will not receive a lump-sum inheritance in the traditional sense. Rather, you’ll typically receive smaller, consistent distributions throughout your life. For example, a fund manager may have been instructed to pay out dividends made by interest-bearing assets held in the Trust. You may also be provided the right to live in or make use of real property owned by the Trust, as if they were your own.
Although you are subject to the specific terms and rules designated by the Trustor at the time they drew up the Trust, you are receiving certain protections. Namely, you are exempt from gift and generation-skipping transfer taxes. Your “inheritance” is also exempt from your personal estate, because your inheritance essentially remains held within the Trust and never distributed to you in full. We expand upon these benefits next.
How Does a Dynasty Trust Help the Beneficiary?
From the beneficiary standpoint specifically, properly-drafted dynasty trusts can offer you strong asset protection. For example, your assets that you would have otherwise inherited will be protected from creditors. Your assets also won’t be subject to division if you were to get a divorce.
Although you wouldn’t have the control to manage any assets held in the Trust, they would exist to benefit you, and possibly for a lifetime. Most often, the assets and property held within the Trust will continue increasing in value throughout your lifetime, which can also relieve some pressure off or your need to save up for requirements or even set up a Trust for your own children. (Assuming that the Trust was set up in a way to eventually benefit your own children and future generations as well.)
If you were to struggle with mental health, substance abuse, or any other circumstances that could impair your ability to spend and save money wisely, a dynasty Trust could also be a blessing in disguise. You may feel that a dynasty Trust is constricting in the sense that you can’t access all of your inheritance at once, but a Trustee can make the judgement calls necessary to protect you from yourself, if and when necessary. This can set you up for better financial success in the long-run.
Last but not least, property held in dynasty Trusts are not included in your own estates. This means that even if dynasty Trust property triples in value, it won’t be subject to estate taxes. This can relieve you and your beneficiaries from double taxation each time a generation passes.
Create a Trust with Trust & Will
Dynasty trusts may seem intricate and complicated, but can offer many benefits to those who can harness their power. Families that have managed to build up a legacy naturally don’t want to see that legacy eaten away by taxes (especially double-taxation), creditors, lawsuits, and irresponsible spending behavior. Instead of allowing an inheritance to pass directly to their beneficiaries, they can use a dynasty trust to support many generations over the long-term.
As a future beneficiary, it may be tempting to sway your parents so that they set up their estate in a way that you receive your inheritance all at once. However, if you stop and think about it, that might not be the strategy that helps you in the long-run. Their estate becomes your estate, meaning that your family legacy will be taxed again and again with each passing generation. You’re also not protected from probate or creditors. Worst case, you won’t be protected from your own self. Instead, a dynasty trust could make distributions that support you throughout your lifetime, will the assets themselves continue to accumulate value. Then, the property and assets held by the Trust can go on to support your children, and their children, and so on. When you zoom out and take a look at the big picture, dynasty trusts can appear very attractive.
Do you feel ready to talk to your family about dynasty Trusts? Make sure to equip yourself with the tools and support needed! We are happy to be of service - Trust & Will provides an online platform that can support your whole family through the entire process of estate planning — all from the comfort of your home! Get started today.
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