A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes such as the gift tax, estate tax and generation-skipping transfer tax (GSTT)— as long as assets remain in the trust.
The dynasty trust's defining characteristic is its duration. The trust can survive for 21 years after the death of the last beneficiary who was alive when the trust was set up, and it can theoretically last for more than 100 years.
The beneficiaries of a dynasty trust are usually the grantor's children. After the death of the last child, the grantor's grandchildren or great-grandchildren generally become the beneficiaries. The trust's operation is controlled by the trustee who is appointed by the grantor. The trustee is typically a bank or financial institution.
A dynasty trust is a type of irrevocable trust. Once it is funded, the grantor will not have any control over the assets or be permitted to amend the trust terms.
Tax Implications of a Dynasty Trust
Assets transferred to a dynasty trust and the value they generate can be subject to gift, estate and GST taxes only when the transfer is made and only if these assets surpass federal tax exemptions. Without further Congressional action, the federal exemption for estate and GSTT stands at $10 million for tax years 2018 through 2025.
So an individual can leave $10 million to a dynasty trust for his or her children or grandchildren without incurring these taxes. Moreover, assets flowing to a dynasty trust as well as the value they appreciate are permanently removed from the grantor's taxable estate, providing another layer of tax relief.
A trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms. But because beneficiaries lack control over these assets, they will not count toward beneficiaries' taxable estates.
However, income tax will still apply to a dynasty trust. Grantors can choose to pay these taxes based on their own tax rates as opposed to the rate imposed on trusts, which is typically less favorable. To minimize the income tax burden, individuals often transfer certain assets to dynasty trusts such as non-dividend paying stocks and tax-free municipal bonds.
Grantors can also set certain stipulations or provisions to dictate how beneficiaries can manage trust assets in order to create financial stability around the trust and support future generations.
This information is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
