Managing Generational Wealth Through Dynasty Trusts

June 25, 2020

If you have significant wealth you’d like to preserve, protect and share with future generations, a dynasty trust might be a strategic estate planning option to consider. 

The dynasty trust is a type of irrevocable trust that’s designed with the long-term, multi-generational transfer of wealth in mind. One feature that makes a dynasty trust unique is the fact that it is designed to last in perpetuity, unlike other trusts, which are designed to have a limited lifetime. In addition, a dynasty trust can have significant estate tax benefits for each successive generation. 

Understanding Dynasty Trusts
Like other trusts, a dynasty trust has a designated trustee who is responsible for managing assets according to the grantor’s wishes. However, once a dynasty trust is created and funded, it cannot be changed and the grantor no longer has direct control over the assets. That means the grantor may not revise the terms of the trust – or change his or her mind – at any point in the future. 

What are the benefits of a dynasty trust? First and foremost, a dynasty trust enables you to protect your wealth for future generations and to pass along your family values. The trust can include detailed language about what’s important to you and why you hope those values will be shared with successive generations. 

It’s also an excellent asset protection vehicle, which means your generational assets will be protected from creditors as well as divorces of beneficiaries. A dynasty trust is also an ideal way to potentially consolidate any other temporary trusts into a single powerful, long-lasting option. 

One of the main advantages of a dynasty trust is the fact that it can help to avoid federal estate tax if you fall below the current exemption limit. In 2020, the exemption limit is $11.58 million for an individual or $23.16 million for a married couple. If you have assets that exceed that federally mandated limit, you can transfer them to a dynasty trust and only pay the estate tax once at the time of transfer. 

As long as the money remains in the trust, no additional estate tax will apply to the trust assets. This is a tremendous benefit for anyone who has amassed significant wealth and wants to protect their children, grandchildren and subsequent generations from estate tax in the future.  

Not for Everyone
A dynasty trust is not a strategic option for every investor. It’s ideal for ultra-high net worth individuals with significant assets who want to manage their wealth across the generations. If you’ve sold a lucrative family-owned business or have a very large estate, a dynasty trust might be a smart choice.

Although there isn’t a minimum dollar amount required to contribute to a dynasty trust, this type of trust is a super high-wealth strategy that makes more sense for individuals with a large, taxable estate or individuals who are concerned that estate taxes will rise in the future. 

Whether or not to choose a dynasty trust also depends upon the number of beneficiaries you have, including children, grandchildren and great-grandchildren. If your family is large and has many beneficiaries – or your estate is relatively small – a dynasty trust may not make sense as an estate-planning tool.

Special Provisions and Restrictions
A dynasty trust can include special provisions, like providing a bonus when your successors graduate from college or get married. It can also include restrictions, like substance abuse provisions. Either way, this type of trust can be customized to meet the unique needs of your family. 

It’s important to work with an experienced estate planning attorney and a trusted financial planner to make sure a dynasty trust is set up and funded properly in order to ensure the seamless transfer of wealth to future generations. 

Because a dynasty trust is perpetual, professional management and administration is critical to invest and allocate funds in accordance with the grantor’s wishes. Management by a professional trustee is recommended, since a professional will always strive to fulfill the grantor’s wishes long after the grantor’s death.

A dynasty trust isn’t the right choice for every investor or every family. However, it can be a strategic tool to help manage your future legacy and to ensure that your successors will benefit from your hard work as well as your generosity for many years to come.

Need help setting up a dynasty trust? Please reach out to us to get started.

AUTHOR:

MALCOLM BUTLER, JD