The term “Dynasty Trust” often invokes images of the Rockefellers, Vanderbilts or other captains of industry who have amassed great amounts of wealth. But a dynasty trust is really just a long-term trust that can be used by anyone, “ultra-wealthy” or not, to help shelter assets from taxes and creditors, and ensure wealth is available for future generations. 

      Assets placed in a properly created dynasty trust are available to the trust beneficiaries, but are not included in their estate for estate tax purposes. As a result, the assets can pass from generation to generation and not be consumed by estate taxes that are scheduled to return to up to 55% in 2011.

      Dynasty trusts can also provide protection from the consequences of divorce or uncontrolled spending by future beneficiaries. Because the assets are legally owned by the trust it is difficult, if not impossible, for the beneficiary’s creditors or a divorcing spouse to reach the assets. Many irrevocable trusts have provisions that address these issues, but dynasty trusts provide protections for beneficiaries now and in perpetuity.

      Additionally, dynasty trusts provide a vehicle for individuals to leave a legacy to future generations. Trusts can be drafted to provide a fund to help ensure that the educational costs of future generations are provided for, or incentives can be included to encourage or discourage certain behavior (e.g. pursue education) or reinforce desired values such as hard work and thrift.

      There are two main hurdles to overcome in creating a dynasty trust. The first is the “rule against perpetuities” which restricts the time period trusts can stay in existence. Typically, the rule against perpetuities requires a trust to end twenty-one years after the death of the last beneficiary alive when the trust was created. This can cause uncertainty when trying to plan for generations to come. However, several states have extended the rule against perpetuities (Nevada’s rule allows trusts lasting 365 years), or eliminated it all together (South Dakota allows trusts to last in perpetuity). In order to have the benefit of these extended time frames the dynasty trust must be located in such a state, which typically means having a trustee located there.

      The other hurdle that must be overcome is really just a practical limitation in the amount that can be placed into a dynasty trust. The IRS recognized that assets placed in a dynasty trust are no longer subject to estate tax, and the generation skipping transfer tax was enacted to limit the amount that can be placed into a dynasty trust without incurring additional taxes. While this can limit the amount that can be initially put into a dynasty trust, once assets have been placed into the dynasty trust, there is no limit on their growth.

      Forming a dynasty trust, and knowing that the trust will continue indefinitely as originally devised, can provide peace of mind that you have helped provide financial security for your family and loved ones for generations to come. Great Plains would be happy to work with you and your attorney to determine if a dynasty trust is something that could help you achieve your estate planning goals.