Leaving a Legacy for Your Heirs
Despite its name, the term “dynasty trust” has nothing to do with aristocracy or the TV show that used to be popular. It involves preserving wealth for your heirs.
With a dynasty trust, you transfer the assets of a business, real estate or other income-producing property to a trust. If they are handled properly, gift tax, estate tax and the generation skipping transfer tax may be avoided on transfers.
Commonly, a dynasty trust is set up as an “inter vivos” trust during your lifetime, but it can also be triggered by a provision in your will upon your death. Depending on the exact terms, the income accumulates or it is paid out on behalf of the trust’s beneficiaries – children, grandchildren and even remote descendants. The trustee you designate has discretion to invade the trust principal if needed.
These assets will not be included in a beneficiary’s estate when he or she dies assuming the assets remain in the dynasty trust . Thus, the funds can continue to compound over several generations without any erosion due to estate tax. Because the assets aren’t owned by the beneficiaries, there is protection against loss from creditors or divorce proceedings. Furthermore, the trust funds are managed and controlled by the trustee of your choice, so your heirs won’t be able to indulge in any wild spending sprees.
These benefits help preserve wealth for your personal “dynasty” for generations in the future.
Caution: This is a highly technical area of the law. State law may also have an impact, so be sure to obtain professional assistance. Contact your estate planning adviser for more information.
A dynasty trust is sometimes called a legacy or perpetual trust.
Some states have a law called the “Rule Against Perpetuities” that limits the duration of dynasty trusts. This rule dates back to English common law and was enacted to keep real estate from being tied up in trusts, which can hinder commercial development. But in recent years, many states have repealed the Rule Against Perpetuities.