A dynasty trust, sometimes called a GSTT trust, is used in estate planning to hold assets for the benefit of several generations of a family. A dynasty trust is a perpetual trust that allows family wealth to grow over a long period of time while taking maximum advantage of estate, gift, and generation-skipping transfer tax exemptions. See gifts and gifting.If one goal of your estate plan is to provide supplemental income, emergency funds, or financial support to your children, grandchildren, and other heirs in the most tax efficient manner, you may want to learn more about a dynasty trust. Because title to trust property does not actually pass to the trust beneficiaries during the term of the trust, a dynasty trust is also an effective means of asset protection from creditors of the beneficiary or the loss of an inheritance to a spouse during a divorce.
How Does a Dynasty Trust Work?
The grantor places property in a dynasty trust to provide for the health, education, maintenance, and support of the grantorís children or other beneficiaries throughout their lifetime. The grantor names a trustee to manage the trust property. Depending on the terms of the trust, a beneficiary may also be the trustee.
The beneficiary of a dynasty trust does not own the property in the trust. While the beneficiary can use trust assets to buy investments such as real estate and stocks, the title to trust property must remain in the name of the trust at all times. See title to property.
While the beneficiary may use trust property, he or she is not at risk of losing it to a creditor or through a divorce because the beneficiary does not hold legal title to trust property. Upon the death of the grantorís children, the trust property can be used for the health, education, maintenance, and support of the grantorís grandchildren or other descendants who are named beneficiaries of the trust.
Advantages of a Dynasty Trust
The following are some of the advantages of a dynasty trust:1. Tax Benefits. Trust property can appreciate over decades and sometimes centuries while avoiding reduction by transfer taxes such as estate taxes and inheritance taxes.2. Asset Protection. Avoid concerns that your childís husband or wife will take part of an inheritance or that an inheritance will be lost to creditors of a beneficiary with poor financial habits.3. Legacy for Heirs. Provide money for the education of your children, grandchildren, and great grandchildren or provide financial security to future generations.
Perpetual Nature of Dynasty Trusts
The length of time a trust can continue for the benefit of your heirs depends on the laws in your state. A dynasty trust is designed to be perpetual. However, many states prohibit trusts from continuing for longer than 80 to 100 years due to the Rule Against Perpetuities.
Several states have abolished or modified the Rule Against Perpetuities which allows dynasty trusts in those states to be created and continue for hundreds of years, and in some cases as long as 1,000 years. Whether a dynasty trust can be created and used in a particular state depends upon applicable state law. To find trust laws by state, go to Trust Law.
Planning Tips for Creating a Dynasty Trust
When your dynasty trust documents are drafted, you will need to make a decision about how much access over trust property to give the beneficiaries. Your dynasty trust can either give a beneficiary a great deal of control over trust assets or it can give discretion to the trustee to make decisions about what the beneficiaries will receive. If you want to encourage certain behavior by the beneficiaries, your dynasty trust can include incentives that reward the attainment of specific goals. For an overview of similar types of trusts, see
silent trusts.Before meeting with an estate planning attorney, think about your goals for the dynasty trust so you can communicate them. See finding an attorney.
When considering a dynasty trust, consult a CPA or tax professional who understands your financial situation. If you own life insurance or stocks that will appreciate in value, it may be advantageous to fund the dynasty trust with such property. Also, a dynasty trust should be funded up to the full amount of the generation skipping transfer tax exemption. Your accountant or tax professional can advise you on these exemption amounts.
Due to the complex nature of dynasty trusts, you will need to hire an experienced estate planning attorney to assist you with the trust and your overall estate plan. A dynasty trust must be prepared with consideration of federal and state estate, gift, and generation skipping transfer taxes.