A trust is a tool used in estate planning that holds an owner’s property for the benefit of another, called the trustor or settlor. The individual who oversees the trust is known as the trustee. The trustee has certain duties to use and protect the trust for the benefit of the beneficiaries.
Trusts may be created for a wide variety of reasons. A trust may be created for the financial benefit of the trustor, for financial support for a surviving spouse or minor children, or for a charitable purpose.
There are many different types of trusts. One type of trust, a dynasty trust, can be used to hold all of an individual’s assets so they can be passed to many future generations.
What is a Dynasty Trust?
A dynasty trust is a legal instrument that can be used to protect assets from estate taxes, creditors, or spouses of trust beneficiaries. The assets that are placed in a dynasty trust are only taxed one time at the inception of the trust. A dynasty trust is irrevocable and provides little discretion to beneficiaries, which may be desirable in some cases.
When setting up a dynasty trust, the grantor, or individual who created the trust, must define the distribution of the trust wealth generation by generation. By this process, a grantor can maximize the trust benefits for future generations.
A dynasty trust is different from a standard will. A will is often used to leave all of a grantor’s property to a few beneficiaries. Those beneficiaries may spend the money or sell the property and leave nothing for future generations.
In a dynasty trust, a trustor retains the power to decide how their wealth will be distributed to the beneficiaries through the generations. Additionally, the trustor can save the beneficiaries a lot of money.
What Does a Dynasty Trust Do?
A dynasty trust can be used to ensure that an individual’s estate is passed down through multiple successive generations. An ordinary will, which only gives property to a beneficiary, often a child of the testator, does not guarantee that the estate will be available for future generations.
It is important to note, however, that once a dynasty trust is created, it cannot be revoked under any circumstances. As with other irrevocable trusts, flexibility is given up in favor of security.
How Long Can a Dynasty Trust Last?
In theory, a dynasty trust can last forever because it is not accessible to creditors or other outsiders. In most cases, however, that legal protection against a creditor does not last indefinitely.
For example, a dynasty trust in Alaska may last for 1,000 years, so long as the assets remain with the beneficiaries of the trust. In many other states, a dynasty trust may last for several hundred years.
Are There Any Tax Benefits for a Dynasty Trust?
One of the many benefits of a dynasty trust is that the transfer of wealth through the generations is exempt from any estate taxes, or death taxes. Usually, an individual can apply for a federal generation-skipping transfer tax (GST).
Unlike a dynasty trust, in most cases, parents will pass their property and money to their children, who may pass it to their own children. In this manner, property is transferred down through generations. The problem with this typical approach is that property is taxed each time it is passed to a new generation.
A dynasty trust can skip a generation and pass it directly on to the next generation. A dynasty trust can be used to pass property directly to an individual’s grandchild rather than by using an individual’s children as a middle man. This way, the heirs will not be required to pay taxes each time they pass the estate to another family member or generation.
Another advantage of a dynasty trust is that it protects a grantor’s assets from creditors. This applies so long as the assets remain with the beneficiaries of the trust.
There are, however, some limits to this exemption. The exact details of the limitations will depend on the circumstances of what the trustor hopes to achieve. It is important to consult with an attorney who is familiar with dynasty trusts.
Can a Dynasty Trust Be Changed or Modified?
There are two main types of trusts, revocable and irrevocable. A dynasty trust is irrevocable. This means that once it is created, it cannot be modified by the grantor. A dynasty trust can theoretically last forever, so long as the grantor has descendants.
Those states that allow dynasty trusts have imposed various time limits and restrictions on the trusts. For example, some time limits end the dynasty trust before it can reach great-grandchildren or any generations beyond that. In Alaska, for example, a dynasty trust cannot last longer than 1,000 years.
Some states apply the common law rule against perpetuities. The rule against perpetuities prevents a trust from lasting longer than 21 years after the death of the last potential beneficiary alive at the time the trust was created.
Some states, however, have abolished this rule. For example:
- Dynasty trusts can exist for 1,000 years in the following states:
- South Dakota; and
- In Delaware, a dynasty trust can last forever with personal property. It can last 110 years with real estate property. However, the limit of 110 years may be restarted if the trustee takes certain steps or measures. A dynasty trust in Delaware could potentially last forever since there is no limit to the number of times a trustee can restart the clock and time limit.
- In California, state laws permit a dynasty trust to exist up to 21 years after the death of the trust creator or 90 years after the creation of the trust, whichever happens first.
What Types of Problems Can Happen with Dynasty Trusts?
Trust disputes and conflicts can arise with any type of trust. Issues may include a conflict regarding the property or assets. Some trusts may not state very clearly which types or items of property are involved. This may lead to disputes among the beneficiaries regarding which property will go to which individual or generation.
These issues often arise as a result of poorly-written trust instruments. An attorney’s guidance can be valuable in this regard, as they can review the trust terms for accuracy.
Issues may also include a conflict over the named beneficiaries. Disputes may also arise due to concerns or uncertainties regarding which individuals are the named beneficiaries.
For example, one family member may claim that a relative is not included in the trust property distributions. There may also be disputes regarding the way that the different generations are defined and which individuals are included in which generation.
These types of disputes are often complex. They may require legal action in order to resolve them. In some cases, damages may be awarded. They may be awarded if an individual has experienced additional losses as a result of a trust conflict or issue.
These types of disputes can often be complex and may require legal action to resolve them. In some cases, damages may also be involved. This can happen for instance if a person experienced additional losses due to a trust conflict or issue.
How Can an Estate Planning Attorney Help?
Yes, it is essential to have the assistance of an experienced trust lawyer for any estate planning issues. If you are considering that a dynasty trust may benefit your family, you may wish to incorporate it into your existing estate plan.
You should speak to an attorney prior to setting up a dynasty trust. Your attorney can prepare your dynasty trust, including the wealth distribution. Trust laws can be complex and vary by state so it is important to have an attorney’s help to ensure your trust is valid and your loved ones will receive what you want them to receive.