top of page
  • Northern Virginia Trusts & Estates

How to Use a Dynasty Trust in Estate Planning

In the past, trusts were subject to limitations on their duration. Many states had regulations known as "perpetuities" that determined when a trust had to terminate. Typically, a trust could extend for 21 years following the death of the last beneficiary alive at the trust's establishment, meaning a trust could last approximately a century. However, specific states have eliminated perpetuity rules, allowing affluent individuals to establish dynasty trusts capable of lasting for numerous future generations. A dynasty trust falls under the category of an irrevocable trust. The grantor can establish strict or lenient guidelines regarding managing and distributing funds to beneficiaries. After funding a trust, the grantor relinquishes control over the assets and cannot modify the trust's terms. The same restriction applies to future beneficiaries of the trust. Initially, the grantor's children typically serve as immediate beneficiaries of a dynasty trust. Following the last child's death, the grantor's grandchildren or great-grandchildren typically assume the role of beneficiaries.

Why Have a Dynasty Trust?

The decision to establish a trust comes with advantages and disadvantages that depend on your financial position. If you possess substantial assets and desire to create a lasting wealth legacy for your family, considering a dynasty trust could be advantageous. To determine if it aligns with your specific circumstances, it is advisable to consult an attorney experienced in trusts. In the case of a dynasty trust, the grantor bears the responsibility of paying taxes. Beneficiaries are liable for income taxes if they receive income from the trust, and generation-skipping taxes defer until the trust concludes and the final beneficiaries inherit the remaining assets. Individuals with considerable taxable assets in their estates tend to benefit the most from dynasty trusts. By establishing a dynasty trust, the trust owns the assets rather than living in the grantor's estate upon their passing.

More on Dynasty Trust Taxes

Assets transferred to a dynasty trust may be subject to gift, estate, and GSTT (generation-skipping transfer tax) taxes, but only at the time of transfer and if the assets exceed federal tax exemptions. However, income taxes apply to a dynasty trust if the assets generate income. To minimize the burden of income taxes, individuals often transfer assets that do not produce taxable income to dynasty trusts. Examples include non-dividend-paying stocks and tax-free municipal bonds. Furthermore, placing assets and their subsequent appreciation into a dynasty trust results in their permanent exclusion from the grantor's taxable estate, providing an additional layer of tax relief. A trustee of the dynasty trust can distribute funds according to the terms outlined in the trust. However, since beneficiaries do not have control over the trust's assets, the trust does not contribute to their taxable estates. Similarly, the trust's assets are safeguarded from claims by the beneficiaries' creditors because they belong to the trust itself and not the individual beneficiaries.

Estate planning is a crucial step in preparing for unexpected events. It is essential to ensure that your spouse will receive the intended assets regardless of their citizenship status. It's worth noting that your estate plan can be adjusted and updated as needed. To make well-informed decisions that prioritize your family's best interests and ensure readiness for whatever lies ahead, it is advisable to seek expert legal advice from the professionals at Northern Virginia Trusts And Estates.

169 views0 comments


bottom of page