Dynasty trust can protect wealth for generations


Creating a trust to preserve wealth for future generations is a common strategy, but traditional trusts may not provide long-term solutions due to tax implications and limitations on their duration.Dynasty trusts are designed to protect appreciated properties such as securities, real estate, life insurance policies, and business interests.

However, the dynasty trust stands out as a powerful tool for enabling wealthy families to transfer wealth across multiple generations, while minimizing tax impact and offering additional non-tax advantages. In this article, we will explore the tax and non-tax benefits of dynasty trusts, along with considerations for setting up and managing them effectively.

Tax advantages of dynasty trusts

Mitigating Transfer Tax: Unlike traditional trusts, dynasty trusts allow assets to be taxed only once, at the time of the initial transfer to the trust. This minimizes the impact of federal estate tax and generation-skipping transfer (GST) tax, which can otherwise erode wealth across multiple generations. The intention is for the trust to hold these assets for many years, shielding subsequent appreciation from estate or GST taxes.

Preservation of Appreciated Assets: Dynasty trusts are designed to protect appreciated properties such as securities, real estate, life insurance policies, and business interests. Any subsequent appreciation in the value of trust assets is not subject to estate or GST tax, providing a significant advantage for preserving wealth across generations.

Basis Adjustment and Tax Implications: The basis of the assets in a dynasty trust is determined at the time of the initial transfer. Depending on the circumstances, the “step-up in basis” rules may help reduce the taxable amount, adjusting the value of inherited assets when transferred after death.

Non-tax advantages of dynasty trusts

Multigenerational Benefits: Dynasty trusts allow the designation of beneficiaries spanning multiple generations, ensuring a lasting impact on a family’s financial security. The trust can distribute assets across children, grandchildren, great-grandchildren, and so on, providing stability and support for future generations.

Asset Protection and Control: The trust can impose restrictions on access to funds, such as requiring beneficiaries to meet specific milestones like graduating from college or securing employment. Additionally, dynasty trusts can safeguard assets from beneficiaries’ creditors, including in the event of divorce or legal action, providing an added layer of protection.

Considerations and practical insights

Irrevocability and Future Planning: It’s important to note that dynasty trusts are irrevocable, meaning significant changes cannot be made once the trust is established. This necessitates careful consideration of future beneficiaries’ needs, as their circumstances may evolve over time.

Establishment and Trustee Selection: Dynasty trusts can be established during an individual’s lifetime or as part of a will, and the choice of trustee is crucial. While family members may seem like natural choices, the potential for conflict makes a professional trustee, such as a CPA, attorney, or banker, a prudent option. This helps ensure effective management and fiduciary oversight.

Rule Against Perpetuities and State Considerations: The traditional “rule against perpetuities” limited the duration of trusts, but recent changes in state laws have expanded the use of dynasty trusts. Many states now allow trusts to last indefinitely, and some actively encourage nonresidents to establish dynasty trusts within their jurisdictions, presenting an opportunity for wealth preservation.

Forever Trust Possibilities: With the potential to hold assets for generations, including “forever,” Collaborating with an experienced estate professional can help ensure that the dynasty trust aligns with long-term objectives and family legacy.dynasty trusts not only offer tax savings over time but also establish a lasting family tradition of financial security. Collaborating with an experienced estate professional can help ensure that the dynasty trust aligns with long-term objectives and family legacy.

Dynasty trusts represent a valuable instrument for preserving wealth across generations, offering comprehensive tax benefits and non-tax advantages to wealthy families. By understanding the mechanics of dynasty trusts and considering key factors in their establishment and management, individuals can create a sustainable framework for wealth transfer and financial security. This enduring approach, supported by expert guidance, paves the way for a lasting family tradition of prosperity and stability.

Thinking about establishing a dynasty trust or any other kind of trust?

The professionals at Sol Schwartz & Associates have been working with high-net-worth families for decades and can apply their deep experience with trusts and tax matters to help you determine the best approach for your situation.  Just leave us your contact information below and we will be back in touch promptly.