A trust is a type of legal estate planning instrument which individuals create in order to organize their wealth and spending needs. A trust is created by a grantor, who creates the rules for the trust according to the applicable legal guidelines.
There are numerous different types of trusts, including irrevocable trusts and revocable trusts. A revocable trust may be revoked or altered by the grantor after it is created. An irrevocable trust, on the other hand, cannot be amended or altered once it is created.
Trust creation typically commences with a grantor determining that they wish to place assets in a trust for the benefit of another individual or individuals, known as beneficiaries. The individual who manages the property in the trust is called the trustee.
The trustee and the grantor may be the same individual. However, in the majority of trusts, the trustee is a different individual.
Once these requirements are met, the grantor will move wealth and assets from their possession into the trust. If there is money in the trust, it may be invested based upon the rules of the trust when it was set up.
The grantor of the trust is also permitted to create rules regarding how a beneficiary may access their trust gifts. This may include an age requirement, a limit on how often it can be accessed, and how much can be withdrawn from the trust at a time.
What are Dynasty Trusts?
As noted above, a trust allows an individual to transfer funds or property to another individual in a controlled and regulated manner. There are many different types of trusts, including a dynasty trust.
A dynasty trust is an estate planning tool by which all of an individual’s assets may be passed on to many future generations.
When setting up a dynasty trust, a grantor is required to define the distribution of the wealth of the trust generation by generation. Using this process, a grantor may help maximize the benefits of the trust for future generations.
A dynasty trust differs from a will in that a will may leave all of a grantor’s property to a limited number of individuals. Those individuals may spend all of their inheritance or sell it and leave nothing for their future generations.
By using a dynasty trust, an individual may retain the power to decide how their wealth will be distributed to their family members through the generations. In addition, the grantor can save a lot of money.
Are There Any Tax Benefits for a Dynasty Trust?
One major benefit of a dynasty trust is that the transfer of wealth through the generations is exempt from the payment of estate taxes, also called death taxes. In most instances, an individual can apply for a federal generation skipping transfer tax (GST).
Typically, parents will pass their monetary funds and property to their children, who will then pass it to their children. In this manner, property is passed down through the generations. This issue with this approach is that the property that is passed down is taxes with each new generation it goes to.
Another advantage of a dynasty trust is that it can skip a generation and pass directly to the next. With a dynasty trust, the grantor can pass their property directly to their grandchildren or their grandchildren’s generation instead of using their children as the middleman.
Using this process, the grantor’s heirs will not have to pay taxes every time they pass the estate down to another family member or generation. A dynasty trust can also provide other advantages.
One advantage of using a dynasty trust is that it can be used to protect the assets of the grantor from creditors. This occurs so long as those assets remain with the beneficiaries of the trust.
It is important to note that there are some limits to this exception, however. The exact details of the limitations will depend on the circumstances surrounding the trust and what the grantor hopes to achieve. If an individual has any questions regarding dynasty trusts, they should contact a lawyer.
Can a Dynasty Trust be Changed or Modified?
As previously noted, the two main categories of trusts are irrevocable and revocable. A dynasty trust falls in the irrevocable category.
Once a dynasty trust is created, it cannot be altered by the grantor. A dynasty trust can, in theory, last forever, so long as the grantor has descendants.
In the states which permit dynasty trusts, some had imposed certain restrictions and time limits. For example, some of the time limits will terminate the dynasty trust before it reaches great-grandchildren and generations beyond that. A dynasty trust in Alaska, for example, is not permitted to last longer than 1,000 years.
The states which are most favorable for dynasty trusts include:
- Nevada; and
- South Dakota.
The states listed above do not impose state income tax on trusts. There are some states which apply the common law rule against perpetuities. In the context of a dynasty trust, this rule prevents any trust from lasting longer than 21 years following the death of the last potential beneficiary who was alive at the time the trust was created.
There are, however, some states which have abolished that rule. These include states where a dynasty trust may last for 1,000 years, such as:
- South Dakota;
- Utah; and
In Delaware, a dynasty trust may exist forever with personal property. If the property is real estate property, there is a limit of 110 years for dynasty trusts.
This 110 year limit, however, may be reset if the trustee takes certain steps. Because there is no limit on the number of times the trustee can restart the clock and the time limit, a dynasty trust in Delaware could potentially last forever.
In California, however, the time limit is much shorter. California state law permits a dynasty trust to exist up to 21 years following the death of the creator or 90 years following the creation of the trust, whichever occurs first.
What Types of Problems Can Happen with Dynasty Trusts?
As with any type of trust, there are trust disputes and conflicts which may arise in relation to a dynasty trust. There may be various issues involved, including conflicts regarding the property or assets in the trust and conflicts regarding the named beneficiaries.
In some cases, conflicts regarding the property or assets in the trust may arise. The trust may not state very clearly which items of property or types of property are included.
This may result in disputes among the beneficiaries regarding which property will pass to which individual or which generation. These types of disputes often result from a poorly-written trust instrument.
These types of conflicts can be avoided by using clearer writing as well as more details regarding specific property or assets. A lawyer’s guidance can be very valuable in this regard, as they can ensure the instrument is clearly and validly prepared.
There are many disputes which are regarding concerns or uncertainties related to which individuals are the named beneficiaries. For example, one member of the family may claim that a specific relative is not included in the trust property distributions.
In the alternative, there may be a dispute regarding the manner in which the different generations are defined and which individuals are included in which generations. Similar to the previous issues, these types of disputes may be avoided by using clear terms and instructions regarding the trust.
Trusts related to dynasty disputes may be complex and require legal action to resolve. In certain cases, a damages award may also be involved. This may occur, for example, if an individual experiences additional losses which are related to a trust issue or conflict.
Should I Consult a Lawyer for Help Creating a Dynasty Trust?
It is very important to consult with a trust lawyer for assistance with creating a dynasty trust. If you are hoping to pass your trust wealth to your children and grandchildren, your attorney can help ensure this occurs.
Your attorney can prepare your dynasty trust and ensure that your desires for the distribution are clearly written. Trust tax rules vary by state and can be complex, so it is essential to have the assistance of an experienced legal professional.