Richard English, J.D., Managing Director-West Region, Commerce Family Office
What is a dynasty trust?
The term “dynasty trust” generally refers to an irrevocable trust that benefits several generations of the grantor’s descendants, with the intent of minimizing estate and generation-skipping transfer (GST) taxes for as long as possible.
A dynasty trust can be created and funded during the grantor’s lifetime or at the grantor’s death. Either way, the trust will be designed to prevent triggering estate tax at each beneficiary’s death, and it will be protected from GST taxes by an allocation of the grantor’s GST tax exemption. This allows for the trust to make distributions to potentially several generations of beneficiaries without being depleted by tax at each beneficiary’s death.
Many trusts for the benefit of a child or grandchild are designed to last only until the beneficiary reaches an age that the grantor considers old enough for the beneficiary to handle the trust assets without the control of a trustee. When the beneficiary reaches that age, the trust will terminate, and the trustee will distribute all of the trust’s assets to the beneficiary.
In contrast, a dynasty trust is designed to last for the lifetime of the beneficiary and typically several generations of the beneficiary’s descendants. In addition to the other benefits of a trust, such as creditor protection and professional management of family wealth, the primary benefit of a dynasty trust lies in avoiding the impact of estate taxes and GST taxes, leaving more wealth in trust for successive generations.
Advantages of a dynasty trust
Transfer tax planning: As indicated above, a dynasty trust is primarily a tax planning tool. Much of the protection from taxes comes from allocating the grantor’s available GST tax exemption to the trust. The GST tax exemption ($13.61 million in 2024 and $13.99 million in 2025) allows grantors to allocate their exemption to certain types of transfers to protect them from GST tax. Because that exemption could be reduced with the sunset of certain tax provisions in 2026, some high-net-worth families may wish to consider creating and funding a dynasty trust before the end of 2025 when the GST exemption could decrease substantially.
Structured wealth transfer over multiple generations: In addition to preserving family wealth through tax planning, dynasty trusts may afford grantors a greater degree of control over the ultimate distribution of that wealth. By keeping family wealth in trust for the benefit of multiple generations, a grantor can set forth the standards under which distributions can be made. For some families with significant wealth, this can provide peace of mind in knowing that their wealth will not be lost to a beneficiary’s creditor or potentially squandered by imprudent spending by the next generation.
Maintaining flexibility for beneficiaries: For those who might be put off by the idea of tying up family wealth for too long, there are options for building flexibility into a dynasty trust. For example, a beneficiary can be given a “power of appointment,” enabling the beneficiary to change the manner in which trust assets will be held and distributed at his or her death. Or, an independent trustee can possess the power to distribute trust assets to the beneficiary for any reason.
Creditor and divorce protection for beneficiaries: Depending on the structure of the dynasty trust and any applicable state laws, a dynasty trust may offer a degree of asset protection from the beneficiary’s creditors. Unlike a trust that terminates when its beneficiary reaches a certain age, a dynasty trust can offer this protection throughout the beneficiary’s lifetime. In many cases, the assets of a dynasty trust may also be protected if a trust beneficiary goes through a difficult divorce.
Considerations for a dynasty trust
A dynasty trust is irrevocable: Since a dynasty trust is an irrevocable trust, the grantor cannot easily change the terms of the trust document. Changing the terms of an irrevocable trust typically requires all involved parties, including the trustee and beneficiaries, to agree to the changes. Alternatively, if the involved parties do not agree to the change, court approval would be required to modify the terms of the trust document. Other methods may also be available depending on state law, but modifying an irrevocable trust is often a complex process.
Consider a corporate trustee: Because a dynasty trust could last many decades, it may be appropriate to select a corporate trustee to serve either as the sole trustee or as a co-trustee with one or more individuals. If unforeseen circumstances prevent an individual trustee from administering the trust, continuity could be lost. Designating a corporate trustee ensures continuity, as the institution can provide long-term, consistent management of the trust’s assets. Corporate trustees may also have more experience, depth of capability, and objectivity than an individual trustee.
Rule against perpetuities: The rule against perpetuities is a rule adopted in many states to prevent the existence of perpetual trusts. In recent decades, many states have limited or even abolished their version of this rule. A well-written dynasty trust will include a provision that avoids violating this rule if it applies.
Example of preserving family wealth with a dynasty trust
Elizabeth is a widow with substantial assets. Her children have managed to build large estates through their own careers and investing. Also, one of her children is an emergency room physician in a large city who is concerned about the potential liability that could arise from treating so many unfamiliar patients.
Elizabeth decides to use up her lifetime exemption from estate and gift taxes by creating separate irrevocable trusts, one for the benefit of each child and that child’s descendants. She designs each trust as a dynasty trust – one that will last for each child’s lifetime and continue on for each child’s descendants. By using dynasty trusts, which will not be subject to estate tax when her children die, Elizabeth avoids adding wealth to her children’s already substantial estates. In addition, the creditor protection afforded by the long-term trust is valuable to Elizabeth’s child who is a physician.
Comprehensive estate planning strategies from Commerce Trust
While a dynasty trust can be an impactful estate planning tool for transfer tax planning and transferring wealth across multiple generations, its efficacy depends on careful consideration of your financial goals and a thorough understanding of applicable laws.
At Commerce Trust, our wealth management teams are comprised of specialists across multiple disciplines who can help you determine which estate planning strategies best support your comprehensive estate plan. If that includes establishing a trust, we will prepare you to meet with an estate planning attorney by offering holistic guidance in advance and can work closely with your attorney on an ongoing basis to ensure your plans are properly executed and aligned with your long-term goals.
Contact Commerce Trust today to learn more about our private wealth management and estate planning services and how we can help you assess the benefits and considerations of various trust options to incorporate the appropriate trust into your estate plan.
The opinions and other information in the commentary are provided as of November 4, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
Investment Products: Not FDIC Insured | May Lose Value | No Bank Guarantee
