Updated January 19, 2021

In the past, dynasty trusts were frequently utilized only by the very wealthy to control and distribute assets. As such, many people have thought that these instruments were applicable only to people at that level. However, dynasty trusts can be helpful to the general public too. Here’s an introduction to them for your information.

The Basics of a Dynasty Trust

Dynasty trusts are irrevocable trusts which allow the original grantor the ability to control wealth and asset distribution over generations. Instead of providing merely a quick pass through once the grantor dies, a dynasty trust can help manage wealth for decades to come. The reason why these entities have been popular are that they help descendants avoid estate and generation-skipping taxes as much as possible.

This control is achieved by how they pay out; instead of distributing out a regular lump sum, a dynasty trust is structured to pay out over the beneficiaries’ lifetime, then transfer payments to the beneficiaries’ children, etc. In theory, a dynasty trust can last forever. Assets allocated to them can increase in value and are protected from potential creditors.

How They Avoid Estate and Generation-Skipping Taxes

Again, the major advantage dynasty trusts have is saving a grantor’s descendants significant amounts of money from estate taxes. This power exists because assets placed in the trust are only subjected to the federal estate tax once upon transfer. Once done, they are no longer taxed, leaving them to increase in value and benefit future generations. In contrast, let’s say for example that you left a beneficiary 1 million dollars without a trust in place. That beneficiary would have to automatically pay the estate tax on that inheritance.

Let’s go further and say that after that tax is paid, the inheritance continued to increase in value and by that person’s passing it rose to 3 million dollars. Whoever is the beneficiary of that new amount will again have to pay the estate tax on it. In essence, a family can pass down an inheritance through generations but are taxed at each point of transfer. A dynasty trust though is not subjected to such constant taxation if well-structured.

Trust Income Taxation

One exception that should be noted though is that tax is still due on income that assets within the trust generate. Because of this reason, grantors prefer placing non-income-producing assets into them. Examples include municipal bonds, growth stocks that don’t pay out dividends, etc. One favorite asset group transferred over are life insurance policies. After the original policyholder passes away, the proceeds from it can help pay estate tax owed on other assets.

Control and Flexibility Issues

When it comes to creating and defining the terms of a dynasty trust, the power lies primarily in the grantor’s hands. As a grantor, you define who are the beneficiaries, as well as what rights they have, etc. From there, a trustee is appointed to manage the funds and spend them based on the recipients’ needs as defined by you as grantor.

Those terms can be either specific or vague, it all depends on how the grantor wishes to set them. In that respect, the beneficiaries are unable to alter the trust’s terms, unless given that power specifically by the grantor during formation. So regarding overall control, a dynasty trust is one-sided as it attempts to predict the needs of beneficiaries for generations to come.

How to Form One

While this is only a brief introduction to these entities, it’s clear to see that dynasty trusts are complex instruments that need careful thought and drafting by both grantor and an experienced lawyer. Making sure that such a trust can secure assets properly, take care of beneficiaries well, as well as be managed competently are all factors to consider.

Thankfully, Anderson’s team has experience in matters of creating various kinds of trusts. If you wish to pass an inheritance on to your family for years to come, then contact us today for a free 30-minute strategy session to discuss these matters now.

Free Strategy Session with an Anderson Advisor

Receive a detailed risk assessment to assist in lowering problem areas that could wipe out all of your assets with one wrong move. Speak with an Anderson Professional Advisor to get your FREE Strategy Session. Limited-Time offer: FREE (a $750 value.)