A Trust That Goes on Forever? Understanding Dynasty Trusts
May 21, 2018
Joe Twidwell • Senior Vice President & Trust Officer
A dynasty trust can be a powerful estate planning mechanism for efficiently transferring wealth to future generations or providing a basic level of support without stifling initiative. However, keep in mind that like all estate planning matters, dynasty trusts are complex and require qualified legal and tax counsel to draft and execute.
WHAT IS A DYNASTY TRUST?
A dynasty trust, also known as a perpetual trust, is a form of trust that directs how your assets will distributed to future generations. With a dynasty trust, you control who the money goes to — and in what amounts — over an unlimited amount of time. It effectively cancels the "rule against perpetuity."
The rule against perpetuity dates back to English law and states that an irrevocable trust may not last longer than the life of the living beneficiaries at the time the trust is created plus 21 years. The application of the rule against perpetuities varies from state to state with many states not allowing perpetual trusts. This underscores the need for qualified legal and tax professionals with expertise in estate planning when contemplating a dynasty trust.
Why Would You Need a Dynasty Trust?
While most trust beneficiaries would prefer to get their inheritance now, there are some grantors (The one with the money who creates the trust) who want the trust they create to continue on for several generations — or forever. Their reasons vary, but the most common are:
1. A Dynasty Trust To Avoid estate & gift Taxes
Dynasty trusts can help you avoid federal estate taxes as significant wealth passes from generation to generation. Even in spite of the recent significant increase in the individual exemption of over $11.2 million, managing estate taxes can be a significant challenge for many affluent families and individuals. Careful planning may help reduce estate taxes and maximize assets transferred to heirs. Fortunately, there are several unique planning mechanisms that can help individuals maintain wealth for generations to come. One such tool is the dynasty or perpetual trust.
Funding the trust may trigger gift taxes. However, given the changes in the taxable estate size, many estates will not have a tax issue in the initial transfer and gifts that are properly structured may also receive a discount for gift tax purposes.
2. A Dynasty Trust To Provide for Future Generations
A dynasty trust can be an effective solution to provide a legacy of opportunities for future generations, without giving them so much wealth that it discourages the personal initiative of the beneficiaries. The trust agreement will specify the trust's beneficiaries, the conditions under which they receive income and/or principal, provisions for loan arrangements to beneficiaries, the term of the trust, and the distribution of trust assets at termination. It can also ease worries of a future heir squandering an inherited lump sum. You can establish specific conditions that beneficiaries must meet in order to receive funds, and you may also include incentive programs that reward the achievements of heirs.
Dynasty Trusts in South Dakota
South Dakota is a state which have very favorable trust laws that allow perpetual trusts. In fact, Security National Bank of South Dakota has worked with a wide variety of dynasty/perpetual trusts and we would be glad to discuss our experiences with you, to see if a dynasty trust might be the solution to your planning question.
If you are interested in learning more about dynasty trusts, make an appointment with a financial advisor from SNB Wealth Management today.