If you’re looking for a way to leave a lasting legacy for your family, dynasty trusts can be a solution. A dynasty trust is an irrevocable trust that can span more than two generations and offers a variety of tax benefits and asset protection features. Because dynasty trusts are so flexible, your estate planning attorney can tailor them to meet your specific needs and goals.
If you’re interested in multigenerational wealth transfer, dynasty trusts should be at the top of your estate planning list! In this blog post, we will discuss the basics of dynasty trusts and how they can help you leave a lasting legacy for your family!
An Introduction to Dynasty Trusts
When people create estate plans, they typically focus on handing down their money and property to their children, grandchildren, and other living heirs. But some people want to leave behind a more enduring legacy.
Dynasty trusts are irrevocable. Irrevocable trusts are trusts that cannot be modified or terminated without the permission of the beneficiaries. You will not easily change the terms once you create an irrevocable trust.
Dynasty trusts offer the minimization of taxable estates and asset protection benefits like other trusts. Still, unlike a trust that ends with outright distributions to your children or grandchildren, a dynasty trust can span more than two generations.
Also known as a perpetual trust, a dynasty trust theoretically can last forever—or at least for as long as trust money and property remain. In North Carolina, our state law used to rule against perpetuities, but dynasty or perpetual trusts are now legal in our state.
Because the trust could last for many years, and it is difficult to change its rules, your estate planning attorney must set up a dynasty trust with great care.
How Does a Dynasty Trust Work?
A dynasty trust, also called a perpetual trust, starts like any other trust. The trust’s creator (i.e., the grantor) transfers money and property into the trust during their lifetime or at the time of their death (testamentary dynasty trust).
Once you transfer wealth into a dynasty trust, you cannot revoke the trust or quickly change the rules. You may only alter the trust’s rules under specific state statutes governing trust modifications.
Dynasty trust assets remain safe even if your financial circumstances change. However, depending on the trust’s rules, it may pass wealth easily or require a potential beneficiary to meet specific requirements to receive assets.
Who Should Serve as Trustee of a Dynasty Trust?
One role that the grantor must seriously consider is who will act as the trustee. It is typical for the grantor of a dynasty trust to name an independent professional trustee, such as a bank or trust company, to serve in this role because they can administer the trust for as long as it lasts.
You can choose a beneficiary to serve as the trustee. However, this raises potential tax and creditor protection issues. A beneficiary-controlled trust can have income and estate tax consequences depending on the trust’s terms and the scope of the beneficiary’s powers. The Federal and North Carolina state tax laws determine how much the control structures of the trust matter.
Whether a beneficiary can control the trust determines the degree of asset protection the trust provides. For example, a beneficiary’s creditors may find a way to pierce the veil if a beneficiary has control of the trust assets. When a beneficiary has power, it also risks family wealth to misappropriation.
In addition, a corporate trustee can allow for uninterrupted administration across generations. Corporate trustees typically charge an annual fee based on the amount of money and property in the trust. They may also provide legal or tax advice, depending on their role.
Who Should Use a Dynasty Trust?
You do not need the dynastic aspirations of the Medici family or the House of Windsor to set up a dynasty trust. However, most of the time, wealthy families set up dynasty trusts to protect significant assets.
Under current law, an individual can put up to $12.06 million ($12.92 million in 2023) in a dynasty trust. (1) In this way, a grantor’s taxable estate may avoid Federal estate taxes after death.
Protecting Family Assets for Generations
No law says you need a certain amount of money to set up a dynasty trust. But practically speaking, a dynasty trust only makes sense if you have money and property that will last for two or more generations. How long your trust property lasts, whether one generation or two depends on the monetary needs of your beneficiaries and whether your remaining assets cover their expenses!
Protecting a Family Business
Another way to use a dynasty trust, other than handing down money to future generations, is to keep a family business in the family.
Anyone who owns a family business is probably familiar with the fact that only 40% of family businesses transition to a second generation, 13% make it to a third generation, and just 3% survive to the fourth generation or beyond! Using a dynasty trust, you can place business shares in the trust to benefit multiple generations of beneficiaries.
For example, your trustee could be a professional who manages business affairs and maintains the continuity of operations while your beneficiaries benefit financially from the business. You can include terms that help ensure the business is run competently, such as requiring the trustee to have an advisory council as a board of directors.
Tax Benefits of a Dynasty Trust
Part of keeping your legacy in the family is saving your hard-earned money from being taxed. You can use the federal estate tax exemption amount of $12.06 million per individual in 2022 (or twice that amount for couples) to fund a dynasty trust.
This way, the money and property transfer directly to your grandchildren without gift tax or generation-skipping transfer tax (GSTT).
Your taxable estate does not include the assets you place in your dynasty trust as long as you keep it under the Federal estate tax exemption amount.
Tax exemption holds for your beneficiaries as well, as long as the trust is fully exempt from GST tax. A GST tax exemption can make all the difference in what your grandchildren receive as an inheritance. Receiving assets outright can bring them Federal and State income tax!
Trust Funds Allow Beneficiaries to Receive Income that is Not Taxable
You may allow trust funds to pay a beneficiary’s living expenses or invest in a home for the beneficiary’s benefit without contributing toward the beneficiary’s taxable estate. In this way, you help heirs avoid income taxes.
Even better, creditors and divorce courts cannot reach beneficiary accounts and the property you leave to your loved ones in a properly drafted dynasty trust.
You and your beneficiaries will not receive these benefits if you give them money outright! To keep money and assets in the family, it makes sense to do tax planning using a dynasty trust to avoid generation-skipping taxes, transfer taxes, and income and estate taxes.
Creating Your Dynasty
If you think a dynasty trust might be right for you, the next step is to speak with an estate planning attorney at our firm. We can help you select a trustee and beneficiaries, consider tax and creditor protections, look at state laws on perpetual trusts, and help you see how a dynasty trust fits into your overall estate plan.
Contact us at Vail Gardner Law to start planning your legacy today.