What is a 'Dynasty Trust '

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes such as the gift tax, estate tax and generation-skipping transfer tax (GSTT)— as long as assets remain in the trust.  

The dynasty trust's defining characteristic is its duration. The trust can survive for 21 years after the death of the last beneficiary who was alive when the trust was set up, and it can theoretically last for more than 100 years.

BREAKING DOWN 'Dynasty Trust '

The beneficiaries of a dynasty trust are usually the grantor's children. After the death of the last child, the grantor's grandchildren or great-grandchildren generally become the beneficiaries. The trust's operation is controlled by the trustee who is appointed by the grantor. The trustee is typically a bank or financial institution.

A dynasty trust is a type of irrevocable trust. Once it is funded, the grantor will not have any control over the assets or be permitted to amend the trust terms. 

Tax Implications of a Dynasty Trust

Assets transferred to a dynasty trust and the value they generate can be subject to gift, estate and GST taxes only when the transfer is made and only if these assets surpass federal tax exemptions. Without further Congressional action, the federal exemption for estate and GSTT stands at $10 million for tax years 2018 through 2025. 

So an individual can leave $10 million to a dynasty trust for his or her children or grandchildren without incurring these taxes. Moreover, assets flowing to a dynasty trust as well as the value they appreciate are permanently removed from the grantor's taxable estate, providing another layer of tax relief. 

A trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms. But because beneficiaries lack control over these assets, they will not count toward beneficiaries' taxable estates. 

However, income tax will still apply to a dynasty trust. Grantors can choose to pay these taxes based on their own tax rates as opposed to the rate imposed on trusts, which is typically less favorable. To minimize the income tax burden, individuals often transfer certain assets to dynasty trusts such as non-dividend paying stocks and tax-free municipal bonds. 

Grantors can also set certain stipulations or provisions to dictate how beneficiaries can manage trust assets in order to create financial stability around the trust and support future generations.

Trust assets are also protected from creditors and ex spouses. 

  1. Grantor Trust Rules

    Grantor Trust Rules outline the responsibilities of the trust's ...
  2. Incentive Trust

    A legally binding fiduciary relationship in which the trustee ...
  3. Grantor

    1. A seller of either call or put options who profits from the ...
  4. Trust Property

    Trust property includes assets such as securities, cash and property ...
  5. Generation-Skipping Trust

    A generation-skipping trust is a legally binding agreement in ...
  6. A-B Trust

    An A-B trust is a joint trust created by a married couple for ...
Related Articles
  1. Managing Wealth

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Financial Advisor

    Irrevocable Trusts: New Trends You Need to Know

    Several improvements and additional provisions have been added to irrevocable trusts in recent years making them considerably more versatile than before.
  3. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  4. Taxes

    Tax-Efficient Wealth Transfer

    Taxpayers with large taxable estates were required to take steps to reduce them before 2011.
  5. Investing

    Establishing a revocable living trust

    This arrangement allows you to have more control over your estate — both before and after your death.
  6. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  7. Retirement

    How To Set Up A Trust Fund In The U.K.

    A guide to the whys and wherefores of setting up this most versatile of estate-planning instruments in the United Kingdom.
  8. Managing Wealth

    How to Set Up a Trust Fund in Canada

    You don't have to be rich to make use of a trust fund. Rules can be complex. Here's what you'll need to discuss with your lawyer.
  9. Managing Wealth

    Surprising Uses for Trust Funds

    Here are five common situations where a trust fund makes financial sense.
  10. Financial Advisor

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center