A dynasty trust allows wealthy individuals to pass on their wealth to future generations without inheritance taxes. It is managed by a trustee chosen by the grantor and provides protection against creditors. While a law passed in 1986 limited the power of dynasty trusts, there is still an exemption allowing a limited amount of funds to be transferred tax-free.
A dynasty trust is a trust set up by an individual to pass on wealth not only to his children, but also to future descendants who survive long after the individual’s death. The trust is beneficial to immediate descendants because it allows them to avoid inheritance taxes. In most cases, a trustee selected by the grantor of the trust is responsible for managing the funds and allocating them to the grantor’s descendants. This type of trust also provides stability for future generations and often contains built-in protection against creditors. Although the United States (US) Congress mitigated the strength of dynasty trusts with a law passed in 1986, there is still an exemption that allows a limited amount of funds to be transferred to a tax-free dynasty trust.
Created as a way for wealthy individuals to ensure that the legacy of their wealth continues for their family into future generations, a dynasty trust is funded by the trust’s grantor and may, depending on the laws of specific states, last in perpetuity . The benefit is that it can provide wealth to current and future generations without being subject to transfer taxes, such as property or gift taxes. Once the trust has been funded, the grantor relinquishes control over the allocated funds.
The grantor can help establish the terms under which the trust is administered. This is done by choosing a trustee to manage the dynasty trust. The duties of the trustee include the administration of the trust, the investment of the funds contained therein and the distribution of the assets. All of these tasks are usually performed on the basis of instructions agreed with the grantor at the inception of the trust. The trustees can be one or more subjects chosen by the grantor; in some cases, the trustee may also be a bank.
One of the other major benefits of dynastic trusts is that they are protected from unforeseeable circumstances that could befall descendants. For example, if a descendant is faced with a large debt, creditors cannot make claims on anything in the estate until it is legally transferred to the descendant in question. This is generally achieved through a spendthrift clause, which also protects the trust from money owed under circumstances such as divorce or child support.
In 1986, Congress passed a law limiting the power of dynastic taxes. This law created a tax known as the generation-hopping transfer tax. He ensured that any gifts to future generations, even in the form of a dynasty trust, were taxable. Some amounts are exempt from these taxes. Individuals can transfer up to $1 million US dollars (USD) into a dynasty trust during their lifetime which is not subject to transfer taxes. If the trust is initiated upon the death of the grantor, that amount rises to $1.5 million USD.
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