A dynasty trust is a trust designed to avoid or minimize estate taxes being applied to great family wealth with each transfer to subsequent generations. By holding assets in the trust and making well-defined distributions to each generation, the entire wealth of the trust is not subject to estate taxes with the passage of each generation.
Dynasty trusts in the United States are the combined result of the imposition of the generation-skipping transfer tax upon trusts that attempted to bypass transferring all assets to children, and the repeal of the rule against perpetuities by states attempting to attract the great wealth of such trusts.
The biggest advantage of a dynasty trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them.
By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again.
For example, say you and your spouse leave $10 million to your daughter. If her inheritance grew, over 30 years, to $30 million, it would be subject to estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2014 ($5.34 million exemption, 40% top rate), almost $9 million would go to pay estate tax. That amount wouldn’t be owed if the money were in a carefully drafted dynasty trust—it would stay in the trust, where it could be invested and keep growing.
This article is not a complete summary of all information available and is not intended as tax or legal advice. To discuss your unique circumstances, consult with the appropriate professional prior to making any financial decision. Investing involves risk and you may lose your principle.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com