A key reason why people conduct estate planning in the first place is the desire to transfer assets to beneficiaries efficiently, but some trusts, such as dynasty trusts, are more appropriate for those wanting to establish a lasting legacy spanning multiple generations. Due to the long-term and irrevocable nature of these trusts, considering carefully before establishing one and carefully reviewing the trust’s terms is vital. Learn when to consider establishing a dynasty trust, and explore how an Arizona estate planning attorney can aid individuals with crafting effective estate plans by calling Harrison Law, PLLC at (480) 320-2310.
What Is a Dynasty Trust?
Otherwise known as perpetual trusts, dynasty trusts are trusts geared toward minimizing or avoiding estate taxes on family wealth as the assets involved are passed to future generations. Per the American Bar Association (ABA), gratuitous property transfers surpassing specific exemption limits incur a range of federal taxes, including the following:
- Gift taxes: Property transfers made during a person’s lifetime exceeding the federal exemption limits incur gift taxes.
- Estate taxes: Transfers surpassing the exemption carried out after the property owner’s death are subject to estate taxes.
- Generation-skipping transfer (GST) tax: Applicable to transfers exceeding the federal exemption limits made to an individual’s grandchildren and descendants of future generations; this tax is an addition to any owed estate and gift taxes.
Assets held in dynasty trusts do not incur GST tax or gift and estate taxes when correctly established, provided that any beneficiary distributions made are clearly outlined. Individuals may only establish perpetual trusts in states that allow trusts to last for extremely long periods or indefinitely, meaning that the state has no rule against perpetuities. The creation of perpetual trusts came about due to the introduction of GST tax; placing assets within a perpetual trust enables families to bypass GST and other taxes for many generations, potentially doing this forever.
Who Should Consider a Dynasty Trust?
Perpetual trusts can offer several tax advantages. They are consequently a popular choice for families with significant assets who wish to maintain their family’s wealth over multiple generations. The following individuals may wish to consider establishing a perpetual trust:
- People wishing to transfer wealth to future generations
- Individuals looking to avoid generation-skipping tax
- Those possessing substantial taxable assets
- Those looking to care financially for multiple generations
- Business owners who wish to ensure the company’s ownership remains within the family
What Are the Downsides to a Dynasty Trust?
Despite their potential advantages, perpetual trusts also pose a number of drawbacks. Some of these include:
Lasting Fiduciary Burden
Perpetual trusts can potentially last forever, which means the trust could outlive the original trustee and all its beneficiaries. Recognizing this possibility, many individuals opt to use professional fiduciaries, such as a bank or financial institution, as the trustees of their perpetual trusts, since it is likely that these organizations will continue to operate after the original grantor, beneficiaries, and initial trustee are no longer living. To develop a more robust understanding of when to consider establishing a dynasty trust, and find out how a seasoned Arizona estate planning lawyer may assist, consider reaching out to an Arizona attorney with Harrison Law, PLLC.
Inflexibility
A perpetual trust is irrevocable. In an irrevocable trust, the grantor or settlor (the individual who creates the trust) is prevented from adjusting the trust terms after the creation of the trust and the finalization of its asset transfers. As an example, if the trust stipulates only investing in specific industries, and technological developments mean these sectors are no longer profitable, adjusting the trust terms to reflect these changes would not be possible. In light of these restrictions, individuals preparing the documents to form a trust should consider specifying guiding principles rather than defining strict conditions.
How Much Money Do You Need To Start a Dynasty Trust?
No minimum funds are necessary for establishing perpetual trusts. However, practically speaking, these trusts are usually most suitable for individuals with significant levels of wealth and substantial assets that can sustain several generations. The exact amount of money required to maintain wealth over multiple generations will depend on the beneficiaries’ responsibilities and financial requirements.
What Are the Characteristics of a Dynasty Trust?
A perpetual trust has several other key characteristics, outside of being irrevocable and long-lasting. Some of these are outlined below.
Beneficiaries
A dynasty trust’s immediate beneficiaries are typically the grantor’s children. Following the death of the grantor’s last child, the settlor’s grandchildren and/or great-grandchildren usually become the trust’s beneficiaries.
Tax
Assets transferred to a perpetual trust that exceed the federal tax exemption may be subject to GST, estate, and gift taxes. Assets within these trusts that produce income for the trust’s beneficiaries also incur income tax. Due to this, to reduce the associated tax burden many individuals only place assets within perpetual trusts that do not generate taxable income, like stocks that do not pay out dividends or non-taxable municipal bonds.
What Is the Best State for a Dynasty Trust?
Since state law governs trusts, the rules related to perpetual trusts can vary depending on where the grantor establishes the trust. For instance, South Dakota, Alaska, and New Hampshire permit dynasty trusts to last indefinitely.
Conversely, Wyoming, Nevada, and Tennessee stipulate that trusts must expire after 1,000, 365, and 360 years, respectively. In Delaware, perpetual trusts concerning personal property may last forever, but such trusts linked to real estate must end after 110 years. Speaking with an attorney in the state where you hope to form the dynasty trust can help you to make an informed decision.
What Is a Revocable Trust vs. a Dynasty Trust?
Grantors have the option to revoke or modify revocable trusts. In contrast, because perpetual trusts are irrevocable, the grantor loses control over any assets transferred to the perpetual trust. The trust’s beneficiaries have no control, either; the assets are managed entirely by the trustee of the trust. Weighing against this potential drawback for many prospective grantors is the fact that the assets in an irrevocable trust, and the appreciation on them, have greater tax benefits and asset protection from creditors due to these assets no longer forming part of the grantor’s or beneficiaries’ taxable estates.
Contact an Arizona Estate Planning Attorney Today
While lacking flexibility, dynasty trusts can be ideal for individuals wanting to transfer wealth across multiple generations without being subjected to transfer taxes, provided these trusts are correctly established. For instance, according to the Internal Revenue Service (IRS), in 2013, dynasty trusts did not incur GSTT, estate, and gift taxes unless the trust assets exceeded the federal tax exemption limit of $12.92 million. Acquire a more detailed understanding of when creating a dynasty trust might be appropriate, and discover how an Arizona estate planning attorney from Harrison Law, PLLC can help with this legal matter by calling our office at (480) 320-2310 today to schedule your personalized consultation.
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This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
