Why is it called a “Dynasty Trust”?

Some are surprised to learn that most trusts are temporary. Unlike a corporation, partnership, or other artificial legal entity, most trusts cannot be perpetual. A rule of law called the “Rule Against Perpetuities” terminates most trusts automatically, and cuts them off at a few generations. As a result, even the most careful trust planning will eventually be unwound, because these temporary trusts will terminate and the property will be distributed outright into the hands of the trust beneficiaries. This limitation can be avoided by using a Dynasty Trust, because it is a perpetual trust. Dynasty Trusts avoid the Rule Against Perpetuities through careful structuring, and can therefore last forever. This feature makes them superior to other trusts. As a result, for families with significant wealth, Dynasty Trusts now form the core of their financial and estate plan.

What are the other advantages of Dynasty Trusts?

A Dynasty Trust may well be the most protective way for a family to own property. Some of these benefits are described below.

Protection from Creditors. A Dynasty Trust can protect its assets in perpetuity from the creditors of the trust’s beneficiaries. Because the trust, not the beneficiary, owns the property, creditors cannot reach the property that remains in trust. For example, a Dynasty Trust may be thought of as a perpetual prenuptial agreement for every descendant of its creator.

Temporary trusts cannot provide this same level of protection. Any creditor protection they afford will terminate when the trust terminates. In addition, the duration of a temporary trust is arbitrary, and has nothing to do with the needs of the beneficiaries. The trust may terminate at precisely the time when the protection is needed most, because its lifespan is predetermined at its creation, and cannot respond to a beneficiary’s creditor problems. A trust beneficiary about to be sued by a business creditor may suddenly find himself the recipient of trust property that will be subject to that creditor’s claims. Even worse, some temporary trusts are designed to terminate at certain beneficiary ages, and distribute property automatically at that age. It would be a simple matter for a potential creditor, like a divorcing spouse, to wait until the day after that important birthday to file suit.

Protection of Family Values. Increasingly, the well-designed estate plan focuses as much on passing along family values as on family wealth. Because a Dynasty Trust is perpetual, it is an especially appropriate tool for “values-based” estate planning, where its creator will attempt to use the trust to pass along her philosophy and work ethic to its beneficiaries. A Dynasty Trust may contain various incentives to induce its beneficiaries to remain productive members of society, and thereby protect its beneficiaries from the “trust fund” syndrome that can result from a trust beneficiary having unfettered access to wealth.

Temporary trusts cannot provide this protection against beneficiary excess, because they must eventually terminate and distribute their property outright into the hands of their beneficiaries. Thus, regardless of the protections written into the temporary trust at its outset, the only thing the trust creator knows for certain is that these protections will eventually be removed.

Protection from Taxes. When properly designed and funded, the assets within the Dynasty Trust are exempt from estate tax in the estates of all family members. In other words, assets in the Dynasty Trust will grow free of estate taxes forever.

For some clients, a properly designed Dynasty Trust may also be used to avoid or defer state and local income taxes.

Are there limitations on funding a Dynasty Trust?

Like any gift to an irrevocable trust, a gift to a Dynasty Trust is potentially subject to gift tax. However, it is relatively easy to avoid the actual imposition of gift tax by only transferring the amount of your remaining lifetime exemption from gift taxes. If you gift-split with your spouse, a married donor may be able to transfer double that amount by using the lifetime exemptions of both spouses. The gift must also be exempt from another type of tax, called the “generation-skipping transfer” (or “GST”) tax. This is usually simple to accomplish because a donor’s exemption from GST tax is generally equal to or more than his or her gift tax exemption. For current lifetime exemption amounts, see this Cheat Sheet on federal estate, gift and GST taxes. Thus, a gift this year to a Dynasty Trust in the amount of your remaining gift/estate and GST tax exemption can be straightforward and would result in no federal gift or generation-skipping transfer taxes.

It is also possible to leverage the exemptions discussed above to make transfers to Dynasty Trusts that are essentially unlimited. Sophisticated planning making use of discounted transfers, insurance, or “estate freezes” can permit the donor to choose the appropriate level of funding and maximize use of her available exemption.

How do the beneficiaries get property from the Dynasty Trust?

A Dynasty Trust may be designed in many ways. It can be structured to allow a beneficiary maximum control over the trust property, so that it feels to that descendant that there are essentially no restrictions on her use of the property. For example, if desired by the creator and depending on the particular circumstances, it may be possible for the beneficiary to be the sole trustee of the trust for her benefit. However, it should be noted that the more control a beneficiary has over the trust assets, the less protected those trust assets may be from potential creditors of the beneficiary.

Other Dynasty Trusts may be more restrictive, and employ a professional trustee to ensure that the beneficiaries are not abusing their access to family wealth. The control structures possible are varied, and can include sophisticated plans such as Family Councils that will allow family input into the administration of the trust without permitting any one beneficiary to control trust distributions.

Regardless of the distribution scheme in the Dynasty Trusts, most of these trusts are created with the expectation that distributions will only be made at a time when the beneficiary will consume the distribution. In other cases, such as where the beneficiary needs access to capital for purchase of a residence, a new business venture, or other investment opportunity, the Dynasty Trust may act as a “family bank” and loan the beneficiary the capital, or may act as a “family venture capital fund” and make a direct investment in the property to be purchased.

What controls can the creator of a Dynasty Trust retain?

The creator of a Dynasty Trust can retain significant control over the trust property even after the trust is created. The creator, for example, may retain the ability to hire and fire the trustees of the Dynasty Trust, and may change the provisions regarding when (if ever) his descendants become trustees. The creator can often retain the ability to determine the trust investment policy, and may even have the final say regarding investments of trust capital. In this way, the creator can have continued control over the trust capital for future investment opportunities.

Further information

There are many ways to structure and fund a Dynasty Trust to meet a family’s goals. Dynasty Trusts are also effectively combined with other sophisticated planning techniques to further magnify their benefits. In order to determine whether and how to create a Dynasty Trust that achieves your financial and estate planning goals, please contact your advisor or attorney.

 

Updated March 2018.

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2019 Wealthspire Advisors

Nicole Hart, J.D.

Nicole Hart is head of our trusts & estates department and works in our New York office.