What are dynasty trusts and how can they be used as estate planning tools?
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UPDATED: Jul 16, 2021
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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.