When it comes to putting together an estate plan, there is no shortage of options for preserving your financial legacy. While preparing a simple will used to be enough, probate litigation, and increasingly complex investment vehicles, maintaining control over the distribution of your wealth while maximizing the amount of your estate that passes to your loved ones requires a comprehensive estate planning strategy.
Generally speaking, the best estate planning tool for most people will be some form of trust (or a combination of trusts). A trust is a legal structure that shifts a person’s assets out of his or her estate, while still allowing for specific and direct control over how those assets get distributed after death. While most non-charitable trusts are designed to facilitate leaving assets to immediate family members, there is a trust – known as the dynasty trust – that can preserve your wealth for multiple generations to come.
What is a Dynasty Trust?
A dynasty trust is an estate planning tool that allows a person to control the distribution of his or her wealth for multiple generations in the future. Rather than providing for beneficiaries to receive trust assets outright at a certain age or a certain point in time, a dynasty trust limits beneficiaries’ access to trust assets in order to preserve them with an eye toward long-term (and potentially indefinite) sustainability of the trust. When adequately funded and properly managed by the trustee, dynasty trusts can provide financial support to multiple generations without estate or transfer tax liability (more on this below), and without the uncertainty of not knowing what your beneficiaries will do with the assets they receive from the trust.
What is Involved in Setting Up a Dynasty Trust?
Dynasty trusts are irrevocable; at a base level, setting up a dynasty trust is similar to setting up any other form of irrevocable trust. The settlor (the person establishing the trust) must choose a trustee and beneficiaries, and then once the paperwork has been drafted the settlor must fund the trust with sufficient assets to achieve its long-term gift and wealth-preservation goals.
However, there are several unique considerations with dynasty trusts, as well. Among them, it is not possible to establish a dynasty trust in all states. This is because the majority of US states have laws that prohibit trusts from living on indefinitely after the settlor’s death. As a result, when establishing a dynasty trust, it is necessary to ensure that the trust will be governed by the laws of one of the limited number of states that allow trusts to survive in perpetuity.
Generally speaking, the law governing a trust is the law of the state in which the trust is administered. So, to avoid questions of long-term enforceability, establishing a dynasty trust usually involves choosing a trust company located in one of the non-duration-limited states to serve as trustee.
Are There Tax Benefits to Establishing a Dynasty Trust?
Yes. When structured and funded appropriately, dynasty trusts can have estate tax, gift tax, and income tax benefits. While the settlor may incur certain transfer-related taxes when funding the trust (although careful tax planning can avoid or mitigate this tax liability, as well), dynasty trusts are specifically designed to avoid estate and gift tax liabilities for future generations. This, of course, assumes that these future generations will have sufficient wealth to be subject to estate taxes in the first place – and that estate taxes will continue to exist at all under then-current political circumstances.
If beneficiaries (i.e., the settlor’s children, grandchildren, and great grandchildren) reside in states that have personal income taxes, then distributions they receive from the trust may trigger income tax liability. However, any trust income that is not distributed will generally be subject to the income tax regime of the jurisdiction where the trust is being administered. As a result, by establishing a dynasty trust in a state without income tax, the settlor can preserve income tax benefits for future generations as well.
Can I Provide for Charitable Giving with a Dynasty Trust?
Yes. There are two primary ways of doing so. The first option is to include a charity as a beneficiary of the trust, but structure the trust so that the charity is only entitled to receive any trust assets not used by descendant beneficiaries. Essentially, family comes first, and whatever is left over when the dynasty trust has served its purpose then goes to charity.
A second option is to use a dynasty trust in conjunction with what is known as a “charitable lead trust.” This option allows for posthumously making charitable donations while your descendant beneficiaries also receive ongoing distributions from the dynasty trust. You can also allow your descendant beneficiaries to select charitable recipients, and can even place conditions on their selections (e.g., they must play an active role in their chosen charity).
Do I Need to Be Concerned About the Generation-Skipping Transfer Tax with a Dynasty Trust?
Potentially. If the value of your estate exceeds the amount of your generation-skipping transfer (GST) tax exemption, the amount you can transfer to your dynasty trust will be limited to the amount of the exemption. Here, too, careful tax planning (including with respect to lifetime gift-giving) can help maximize the benefits of establishing a dynasty trust.
What Are Some Other Benefits of Using a Dynasty Trust for Estate Planning?
Along with tax savings and long-term wealth preservation for multiple generations, another benefit of using a dynasty trust is that it can shield trust assets from liabilities that may arise during your beneficiaries’ lifetimes. For example, suppose your grandchild gets divorced. If he or she receives trust assets outright, those assets could become subject to division during the divorce process. However, by keeping assets within the dynasty trust, they avoid any chance of becoming part of your grandchild’s marital estate.
The same principle applies to creditor claims and civil judgments. As a result, using a dynasty trust can effectively serve as an asset protection plan for your immediate beneficiaries, as well as generations down the line.
Should I Consider a Dynasty Trust?
So, this is the big question. Should you include a dynasty trust in your estate plan?
Maybe. As with all types of estate planning tools, deciding whether to incorporate a dynasty trust into your estate plan requires a careful assessment of the value of your estate (currently and as anticipated in the future), your estate planning goals, and your financial and family circumstances. To summarize, some of the key considerations include:
Advantages of Using a Dynasty Trust:
- Ability to preserve your wealth for future generations
- Ability to including charitable giving in your estate plan
- Asset protection for future generations
- Potential estate tax and income tax savings
Disadvantages of Using a Dynasty Trust:
- Limited flexibility during your lifetime due to dynasty trusts being irrevocable
- Limited flexibility for beneficiaries with respect to making use of trust assets
To learn more about whether a dynasty trust makes sense for your estate plan, contact Jiah Kim & Associates for an initial consultation.
Speak with an Estate Planning Attorney at Jiah Kim & Associates
If you would like to speak with an attorney about incorporating a dynasty trust into your estate plan, we invite you to schedule an initial consultation. Call Jiah Kim & Associates at (646) 389-5065 or book your appointment online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.