Asset Protection

Dynasty Trusts

Home > Blog > Estate Planning > Dynasty Trusts

This is a part in a series of articles I have written on various types of irrevocable trusts.

What is a Dynasty Trust?

Many people refer to dynasty trusts to mean an irrevocable trust that is built so that after the death of the grantor, the trust benefits the grantor’s descendants. 

I don’t disagree with this definition but, to me, a “true” dynasty trust is not just to provide for your descendants, but also to ensure that there are no estate taxes at your death nor at the death of your descendants. To accomplish this, a “true” dynasty trust should be built in a state that allows for a trust to last as long as possible. In California a trust may last approximately 120 years. In a state like Nevada, a trust can last for as much as three times longer, 365 years. 

Thus, a dynasty trust is a long-term irrevocable trust designed to pass family wealth to future generations while protecting the wealth from estate taxes and lawsuits. If structured properly, a Nevada dynasty trust can avoid the estate tax, gift tax, and generation-skipping tax for up to 365 years. 

In order to qualify for zero estate taxes for successive generations, the grantor designing the dynasty trust must allocate generation-skipping transfer tax (GSTT) exemption to the assets transferred into the dynasty trust. If the applicable inclusion ratio of the trust is zero, then no estate taxes will be owed by the descendants when all the trust beneficiaries are grandchildren and beyond.

A dynasty trust can be built in your living trust so that at the death of the trustmakers, the trust turns into a dynasty trust. Alternatively, a dynasty trust can be a standalone irrevocable trust created while the grantor is alive. 

A Dynasty Trust is Less of a Trust and More of a Feature in a Trust

People say to me sometimes, “I want a dynasty trust.” That is like saying, “I want dairy.” There are different types of dairy: there’s cheese, there’s milk, there’s eggs. All of these are dairy products. There is no one object called “dairy.”

Similarly, a dynasty trust is more a feature of a trust. An IDGT can be set-up as a dynasty trust or not. A living trust can turn into a dynasty trust after death. A SLANT can start as a dynasty trust and then stop becoming one. 

Thus, any trust that has the feature of providing for multiple generations and avoiding estate taxes for each generation is referred to as having dynasty trust provisions.

Advantages of a Dynasty Trust

  • ESTATE & GST TAX SAVINGS – Normally any assets held in your name will be included in your taxable estate at death and will be subject to estate taxes. In a one-generation irrevocable trust, estate taxes will not apply to the first generation, but at the death of the second generation and succeeding generations, there may be an estate tax due.

    Thus, the unique feature of a dynasty trust is that assets held in the trust can grow free of estate taxes both for the first generation as well as for successive generations. This means assets in the trust can grow exponentially through compounding interest. The assets used to initially set up the trust will be valued and that value will be deducted from your lifetime gift tax exemption, but any future growth would be outside of your estate as well as your beneficiaries’ estates for as long as state law allows. Furthermore, if GSTT is allocated for all gifts made into the trust, then the assets that grow within the trust will never be subject to GST taxes during the lifetime of successive generations as well!
  • CREDITOR PROTECTION FOR YOUR BENEFICIARIES – One rule of thumb when it comes to asset protection is that ownership gets you nowhere. By owning assets, you have a proverbial bull’s-eye drawn around you. Thus, when it comes to asset protection, it is far wiser to transfer your assets to those you love, while still controlling the asset and how it is managed. There are several types of irrevocable trusts that can do this, such as DAPTs and Hybrid-DAPTs, IDGTs, SLATs and SLANTs, to name just a few. In all of these trusts, the trust – and neither the grantor nor the beneficiary – is the legal owner of the assets, therefore the assets are protected against creditors and divorcing spouses.

Conclusion

Dynasty trusts offer significant tax benefits, so any asset with the potential to appreciate is a good asset to put inside a dynasty trust. In building a dynasty trust, it is important to choose a state that permits a trust to last as long as possible so that the benefits of the dynasty trust can be fully leveraged.

Contact Us

We want you to feel comfortable discussing your legal issue with us, so we offer a free consultation to learn about your problem. Contact us today to setup a time to come in and talk with our team.

Our Firm Locations

Anaheim Hills

Bridge Law LLP

155 N. Riverview Drive Suite 212,
Anaheim, CA 92808
Get Directions 714-525-2400

Los Angeles

Bridge Law LLP

611 Wilshire Blvd #325 Los Angeles,
CA 90017,
Get Directions

By Appointment Only

714-525-2400

Union City

Bridge Law LLP

2 Union Square Suite 102 Union City,
CA 94587,
Get Directions

By Appointment Only

714-525-2400

Contact Us Today

We want you to feel comfortable discussing your legal issue with us, so we offer a free consultation to learn about your problem. Contact us today to setup a time to come in and talk with our team.