How Dynasty Trusts Can Preserve Wealth Across Generations

You have worked hard to build your wealth and provide for your family's future. Whether you've accumulated wealth through years of prudent saving, wise investments, or successful business ventures, preserving that wealth for your children, grandchildren, and future generations is likely a priority. One of the most effective tools available for this purpose is the Dynasty Trust. Read on to learn how Dynasty Trusts can preserve wealth across generations.

What Is a Dynasty Trust?

A Dynasty Trust is a long-term trust designed to pass wealth from generation to generation without the need for the assets to be subject to estate taxes at each generational level. Unlike typical trusts that may last only for the lifetime of a beneficiary or a set number of years, Dynasty Trusts can potentially last for generations, depending on state laws and the trust's specific terms.

In simple terms, a Dynasty Trust is a legal vehicle that allows you to transfer wealth to your descendants while minimizing the tax burden and protecting the assets from creditors, divorces, and other risks.

Dynasty Trust Benefits

Tax Efficiency

One of the primary advantages of a Dynasty Trust is its ability to minimize or even eliminate estate taxes across multiple generations. Since estate taxes can significantly reduce the amount of wealth passed on to heirs, this feature alone makes Dynasty Trusts an attractive option for high-net-worth individuals.

As of 2024, individuals can transfer up to $13.61 million (up from $12.92 million last year) without incurring federal estate taxes. Couples can combine their exemptions, allowing for the transfer of nearly $27.22 million. By placing assets in a Dynasty Trust, you can take advantage of these exemptions and potentially avoid estate taxes for multiple generations.

Asset Protection

In addition to tax savings, Dynasty Trusts offer robust protection against creditors, lawsuits, and divorces. Since the trust owns the assets rather than the individual beneficiaries, those assets are generally shielded from claims against the beneficiaries. This protection ensures that the wealth you've worked hard to build remains intact and available for future generations.

Control Over Wealth Distribution

Dynasty Trusts allow you to dictate how and when your wealth is distributed to your heirs. You can set specific terms that align with your family's values, such as incentivizing educational achievements or charitable contributions. This control helps ensure that your descendants use the assets wisely and that your legacy aligns with your vision.

Perpetuating Family Values and Legacy

A Dynasty Trust isn't just about preserving financial wealth; it's also about passing down your family's values, beliefs, and legacy. You can include provisions in the trust that promote charitable giving, responsible financial management, and other principles that are important to you. By doing so, you ensure that your wealth serves a purpose beyond mere financial support.

How Does a Dynasty Trust Work?

To understand how a Dynasty Trust works, it's essential to grasp the following key components:

Grantor

The grantor is the person who establishes the trust and transfers assets into it. As the grantor, you have the power to set the terms of the trust, including how and when the assets will be distributed to your beneficiaries.

Trustee

The trustee is the individual or entity responsible for managing the trust according to the terms set by the grantor. The trustee has a fiduciary duty to act in the best interests of the beneficiaries, ensuring that the trust's assets are preserved and used as intended.

Beneficiaries

The beneficiaries are the individuals or entities who will receive the benefits of the trust. In a Dynasty Trust, the beneficiaries can include your children, grandchildren, great-grandchildren, and so on.

Generation-Skipping Transfer Tax (GSTT)

The Generation-Skipping Transfer Tax is a federal tax on transfers of property to a beneficiary who is more than one generation below the transferor, typically grandchildren. However, Dynasty Trusts are designed to take advantage of the GSTT exemption, allowing you to pass assets to future generations without incurring this tax.

Example: How a Dynasty Trust Preserves Wealth

Let's consider an example to illustrate how a Dynasty Trust can preserve wealth across generations:

Imagine you have $20 million in assets and decide to establish a Dynasty Trust. As of 2024, you and your spouse can transfer up to $27.22 million (using both of your exemptions) into the trust without incurring federal estate taxes. Over the years, the trust's assets grow through investments.  Because the trust is structured to last indefinitely, the wealth continues to compound.

As the generations pass, your descendants receive distributions from the trust according to the terms you've set. These distributions might be used for education, starting a business, purchasing a home, or other purposes. Importantly, because the assets remain in the trust and are not part of each beneficiary's estate, they are protected from estate taxes, creditors, and divorces.

Considerations When Setting Up a Dynasty Trust

While Dynasty Trusts offer significant benefits, they are complex legal instruments that require careful planning. Here are a few considerations to keep in mind:

1. Choosing the Right State

Not all states allow Dynasty Trusts to last indefinitely. Some states have a "rule against perpetuities" that limits the lifespan of a trust to a certain number of years. However, several states have abolished this rule, making them ideal locations for establishing a Dynasty Trust. States like South Dakota, Delaware, and Nevada are popular choices for Dynasty Trusts due to their favorable trust laws.

North Carolina Permits Dynasty Trusts

Here in North Carolina, you can set up a Dynasty Trust.  In 2007, North Carolina legislature passed legislation that allows Dynasty Trust. However, the trustee must be able to sell the trust’s property.

2. Selecting a Trustee

Choosing the right trustee is crucial to the success of a Dynasty Trust. The trustee will be responsible for managing the trust's assets and ensuring that the terms of the trust are followed. You can choose an individual trustee, such as a family member, or a corporate trustee, such as a bank or trust company. Some grantors opt for a combination of both to balance personal insight with professional management.

3. Funding the Trust

To maximize the benefits of a Dynasty Trust, you'll need to carefully consider which assets to transfer into the trust. Common assets include cash, securities, real estate, and closely held business interests. It's essential to work with an estate planning attorney and financial advisor to ensure that the trust is properly funded and aligned with your overall estate plan.

4. Balancing Control and Flexibility

While it's important to set clear terms for how the trust's assets should be used, it's also wise to build in some flexibility to account for changing circumstances. For example, you might allow the trustee to make discretionary distributions based on the beneficiaries' needs or include a mechanism for modifying the trust if tax laws or family dynamics change.

5.  The Trust is Irrevocable

When you create a Dynasty Trust, neither you nor your trustees can make changes to the Dynasty Trust.  Whatever terms, trustees, beneficiaries and distributions you initially select are permanent.  And, you lose control of all the trust assets.

 However, because it is irrevocable, the Dynasty Trust gives beneficiaries protection from creditors, protection from bankruptcy, long-term care costs and Medicaid Recovery in North Carolina. 

6.  Tax Considerations

Income taxes still apply to a Dynasty Trust if the trust assets produce income.  So, what might be a good asset to put in a Dynasty Trust?  Non-dividend paying stocks and tax-free municipal bonds would be a perfect example.

Additionally, the Grantor is responsible for paying taxes on a Dynasty Trust. The beneficiaries will pay income taxes as well on any income they receive from the Dynasty Trust. 

7.  Trustee Considerations

Because Dynasty Trusts are created to last generations, they create a lengthy fiduciary obligation.  It is possible that your trust could outlive every named successor you appoint.  So, you need to either consider naming a corporate fiduciary or have a plan in place to name successor trustees.

Conclusion: Building a Lasting Legacy with a Dynasty Trust

For Generation X and Baby Boomers who have accumulated significant wealth, the desire to leave a lasting legacy is often a top priority. A Dynasty Trust offers a powerful tool to achieve this goal, providing tax efficiency, asset protection, and control over how your wealth is used across multiple generations.

By working with an experienced estate planning attorney, you can design a Dynasty Trust that reflects your values, protects your assets, and ensures that your legacy endures for generations to come. Whether you're looking to support your children's education, foster entrepreneurial endeavors, or promote charitable giving, a Dynasty Trust can help you achieve your long-term goals while preserving the wealth you've worked so hard to build.

Contact US

If you're considering establishing a Dynasty Trust or want to explore other estate planning options, contact our office today. We're here to help you navigate the complexities of estate planning and ensure that your wealth is preserved and passed on according to your wishes.  Setting up a Dynasty Trust involves complex tax issues, financial issues and carefully drawn up legal documents. So, it’s very important that you consult, and work, with an experienced estate planning attorney.