Maximize Your Legacy: Is a Dynasty Trust the Key to Preserving Your Wealth?

With the 2024 elections on the horizon, tax discussions are increasingly focused on potential changes that could impact estate planning strategies. Estate planning opportunities today are very favorable, especially if you have assets you intend to gift in the future.

The Applicable Exclusion Amount (AEA) set at $13.61 million for individuals, thanks to the Tax Cuts and Jobs Act of 2017. However, the clock is ticking towards 2026 when this figure is expected to halve.

It’s a great time to look into dynasty trusts—helpful tools for protecting your family’s wealth through the ups and downs of tax policies. In this article, we’ll dive into what a dynasty trust is, why it might be a savvy move for your estate planning.

Understanding the Dynasty Trust

A dynasty trust is a special type of irrevocable trust that can last for generations. Also known as a perpetual trust, a dynasty trust that can enable families preserve and transfer wealth from generation to generation without triggering transfer taxation such as gift, estate or generation-skipping transfer tax.

A Dynasty Trust isn’t just for the ultra-rich; it’s a practical tool for anyone looking to extend their legacy far into the future.

In its essence, a Dynasty Trust can operate indefinitely, depending on state laws. While some states adhere to a traditional Rule Against Perpetuities (RAP) which limits the trust’s duration to about 90 years, others have extended this to several centuries, and some have even abolished the RAP altogether, allowing these trusts to last forever.

Determining if you should use a dynasty trust is a big decision, one that you need to consider thoroughly.

Why Consider a Dynasty Trust?

1. Tax Efficiency: With the current AEA, a couple can shield over $27 million from federal estate taxes. Utilizing a Dynasty Trust can lock in these high exemption rates before they potentially decrease in 2026, providing significant tax savings over multiple generations.
2. Long-Term Asset Protection: By placing assets in a Dynasty Trust, they’re managed by a chosen trustee rather than being directly owned by beneficiaries, thus shielding these assets from creditors, legal judgments, or divorces.
3. Control Over Wealth Distribution: Dynasty Trusts allow the grantor to set terms for how assets are managed and distributed across generations, helping to prevent mismanagement by future beneficiaries.

Dynasty Trust Example

Imagine setting aside $5 million into a Dynasty Trust. Instead of being subject to estate taxes at each generational transfer—which could greatly diminish the assets over time—the full amount can grow and benefit multiple generations without repeated taxation. This not only maximizes the financial growth over decades but also secures your legacy according to your wishes.

What Are the Disadvantages of Dynasty Trusts?

Now, let’s discuss the drawbacks to creating a dynasty trust.

Since dynasty trusts are irrevocable and perpetual, the terms you set up in the trust may become outdated. Once you’ve set the terms of the trust, you’re unable to make any changes. This means that dynasty trusts aren’t necessarily a good fit if changing family dynamics or asset structures could affect your future plans.

Also, setting up a dynasty trust is a complex legal process that requires significant time and money to accomplish. Since you’re setting up a dynasty trust in perpetuity, advisers need time to discuss who the trustees will be, what money and assets will be used, and under what circumstances the terms of the trust can be altered.

Lastly, dynasty trusts are sometimes set up so it seems like a hand is controlling from the grave. Since the trust is designed to continue and retain most assets for an indefinite period after its creators die, a dynasty trust often pays mainly income only to the beneficiaries. This income to your family can be eaten up by high legal and trustee fees, legal disputes, and misbehaving trustees.

As the grantor, you set the rules for the trust — no matter how strict or lax you might want those rules to be. Since the trust’s beneficiaries cannot change the terms either, so it is imperative that you set up your dynasty trust carefully.

Is It Right for You?

To recap, a dynasty trust can be a good way to create a tax-efficient legacy.

Once assets are into dynasty trust, they are no longer subject to a 40% to 50% estate tax rate or the Generation Skipping Tax (GST), depending on what state you’re in.

However, this is not a decision to be taken lightly. It requires careful consideration, expert advice, and a clear understanding of both the benefits and the limitations of a dynasty trust. If your situation aligns with the criteria for a dynasty trust, and you reside in a state that supports this type of trust, it may be a pivotal step towards securing your family’s financial legacy.

If you decide to go this route, cbe sure to engage with knowledgeable professionals, clearly outline your intentions and values in writing, and regularly communicate with your trust beneficiaries. It’s important to talk about the family mission and legacy. This helps set expectations and creates peace among family members.