What are dynasty trusts and how can they be used as estate planning tools?

Assets in a dynasty trust are continuously manged and disbursed without being transferred to a specific beneficiary. A dynasty trust, also called a perpetual trust, a generation-skipping trust, or a generation-skipping transfer, allows successively younger individuals, usually family members, access to the assets of the trust without fully disbursing the funds. As the trust earns income, their children, grandchildren, and other descendants can draw upon the assets according to the terms of the dynasty trust.

A dynasty trust is a useful estate planning tool because it is not fully disbursed at one time. Instead, the dynasty trust continues to earn interest as beneficiaries withdraw from it according to the terms of the trust agreement. If managed properly a dynasty trust can provide for several generations of beneficiaries as named by the trust’s creator.

There are also many tax advantages to a dynasty trust. As long as the assets remain in the trust, they are not subject to estate taxes as they would be in the event of an asset transfer. Furthermore, there is a federal tax exemption for transfers from the trust to beneficiaries who are two or more generations removed from the grantor. This exemption is called the generation-skipping transfer (GST) tax exemption.

The federal legislation also built portability into dynasty trusts. Portability means that the exemption of a predeceased spouse, if it was not used, can be used by the surviving spouse. For example, say a husband created a dynasty trust and passes away. His estate was worth $1 million and he had a $5 million individual tax exemption. The remaining $4 million exemption can be used by his wife, so if she also has her individual exemption of $5 million, then she can create a dynasty trust with a maximum exemption in the amount of $9 million.

Any party thinking about establishing a dynasty trust to provide for several generations of beneficiaries should ensure the trust is properly established and managed by consulting with an estate planning attorney. An experienced estate planning attorney can help the creator of a dynasty trust properly establish the trust in accordance with their intentions.

Case Studies: Utilizing Dynasty Trusts for Effective Estate Planning

Case Study 1: The Jefferson Family

The Jefferson family, consisting of John and Emily Jefferson, wanted to establish a trust that would provide for their children, grandchildren, and future generations. They sought the expertise of an estate planning attorney who helped them create a dynasty trust. By structuring the trust properly, the Jeffersons ensured that the trust’s assets would continue to grow and be available for their descendants, while also benefiting from the generation-skipping transfer (GST) tax exemption.

Case Study 2: The Smith Corporation

The Smith Corporation, a successful family-owned business, wanted to secure its wealth for future generations. The company founders, Robert and Elizabeth Smith, decided to establish a dynasty trust to preserve their assets and provide ongoing financial support to their children, grandchildren, and beyond. By implementing a well-managed dynasty trust, the Smith Corporation was able to shield their assets from estate taxes and ensure the long-term financial stability of their family.

Case Study 3: The Anderson Family

The Anderson family had significant wealth and wanted to establish a trust that would protect their assets from estate taxes and potential creditors. They turned to an experienced estate planning attorney who helped them create a dynasty trust. By utilizing the portability feature of dynasty trusts, the Andersons maximized their tax exemptions and created a trust structure that allowed the surviving spouse to use the unused exemption of the predeceased spouse. This strategy ensured the preservation of their wealth for future generations.