Dear Trust Officer: I’m intrigued by something I heard about recently called a “dynasty trust.” What is that, and how does it work?
— Legacy builder
DEAR LEGACY BUILDER:
Traditionally trusts with private beneficiaries were not permitted to last forever, but had to have a determinable end date. This policy was enforced by the “rule against perpetuities,” a complex formulation that was the bane of many law students. As a simplifying rule of thumb, a private trust generally had to end in about 90 years or so. Wholly charitable trusts, in contrast, could last forever.
Recently, some states have amended their trust laws, and one important change has been the lengthening of the permissible life of a private trust to 360 years or more. Some have eliminated the restriction. Kansas is a state that has not removed the “rule against perpetuity.”
The longer life for private trusts has given rise to the multi-generational “dynasty trust.”
The other aspect is taxation. There is a federal tax on major gifts, large estates, and “generation-skipping” transfers (GSTs) associated with trusts. There is an exemption from the GST tax, and it matches the federal estate tax-exempt amount. It is theoretically possible to put assets into a dynasty trust, sheltered by these exemptions, and have those assets provide family financial protection for generations without further transfer taxes. Income taxes still would apply.
Do you have a question concerning estate planning? Send your inquiry to Stephen A. English at firstname.lastname@example.org.