How a Dynasty Trust Works

Eric Van Haaften Estate Planning with Life Insurance

A dynasty trust is a powerful tool for preserving your family’s wealth across multiple generations.

These perpetual trusts provide long-term benefits by allowing wealthy families to pass on assets without incurring estate taxes.

In this article, we will give you an overview of what dynasty trusts are, how they work, and what benefits they offer for your estate planning.

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What is a Dynasty Trust?
How does a dynasty trust work?
How is a legacy trust funded?
How does life insurance fit inside a perpetual trust?
What are the Dynasty Trust’s pros and cons?
FAQ: Dynastic Trusts for Estate Planning

What is a Dynasty Trust?

Some affluent individuals accumulate enough wealth to support their children and grandchildren throughout their lifetimes.

For those who want to establish a lasting legacy beyond just one or two generations, a dynasty trust can be a tax-efficient solution to make this vision happen.

A dynasty trust, also known as a legacy or a perpetual trust, is a type of irrevocable trust you or your beneficiaries cannot change or control once it is funded. Yet, you still have authority over investment decisions and how the assets are distributed to beneficiaries.

One of the significant advantages of a dynasty trust is its tax benefits. The assets transferred into the trust are excluded from your taxable estate upon death and subsequent beneficiaries’ estates when they pass away.

This allows these assets to grow without being subject to taxation within the enduring structure of the dynasty trust.

Additionally, a legacy trust provides asset protection. By placing assets in this type of trust, they become shielded from creditors and potential division during divorce proceedings.

Since legal ownership lies with the trust rather than individual beneficiaries, external parties seeking claims or settlements cannot touch these protected assets.

How Does a Dynasty Trust Work?

By establishing a dynasty trust, you create a separate entity that can continue providing for future generations without estate and gift taxes when passing on assets from generation to generation.

It is helpful to understand the three critical participants of the trust, which include the grantor, trustee, and beneficiaries.

As a grantor, you are responsible for establishing, funding, and selecting the duration of your dynasty trust.

Grantors must write the trust document with all the rules and duration of the trust. According to Finance Strategies, trust duration can vary based on state laws. It can be set for a specific term, multiple generations, or indefinitely.

Grantors also need to pick the assets they will transfer these assets into the trust, such as life insurance, securities, real estate, or business interests.

The trustee manages its assets on the grantor’s behalf. You can choose a person, but selecting an impartial company as a trustee is advisable.

Eventually, after the grantor’s death, distributions from the trust are given to the beneficiaries.

Typically, it is recommended to designate the grantor’s children as beneficiaries of the legacy trust, with grandchildren or great-grandchildren becoming beneficiaries after their parents pass away.

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dynasty trust example

The grantor, who creates the trust, transfers assets into it using their lifetime gift tax exemption and GSTT exemption. In 2024, These exemptions allow up to $$13.61 million per person or $$27.22 million for married couples to be transferred without incurring transfer taxes.
The grantor appoints a trustee to manage the trust assets and distribute them according to the terms outlined in the trust document. This document specifies rules, conditions, and purposes for distributions and determines how long the trust will last.
The assets within the dynasty trust are excluded from both the grantor’s taxable estate and those of beneficiaries as long as they remain in the trust.
The trust assets are also protected from creditors, lawsuits, and divorcing spouses of the beneficiaries.
As each generation passes on, sub-trusts are created within the dynasty trust for each living heir. These sub-trusts operate under identical terms set out in the original trust until its expiration or depletion of assets.

How Is a Dynasty Trust Funded?

A dynasty trust is typically funded through annual gifts or directly transferring assets into the trust during one’s lifetime or upon death.

When funding a legacy trust, it is essential to consider the tax implications. White Coat Investor says Uncle Sam imposes a hefty income tax of nearly 40% on these trusts.

Funding the trust with mostly tax-free assets is advisable to avoid an annual tax bill. Popular choices for funding dynasty trusts include non-dividend growth stocks, tax-free municipal bonds, and life insurance policies.

However, it is crucial to note that there are limits on the amount of assets that can be transferred to a dynasty trust without incurring transfer taxes.

As of 2024, individuals can give away assets up to $13.61 million without facing gift taxes. Couples have a higher limit of $27.22 million.

The real advantage of a dynastic trust is that it allows for long-term inheritance planning, as the assets held within the trust are indefinitely exempt from federal gift and estate taxes.

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How much does it cost to set up a dynasty trust?

Setting up a dynasty trust is a complicated legal document that requires significant time and money.

We recommend discussing other potential pros and cons of using dynasty trusts with an estate planning attorney.

If you want to set up a perpetual trust, attorneys will need time to discuss who the trustees will be, what assets will be used, and how the trust can be changed.

A dynasty trust can range from $3,000 to more than $30,000 in cost to set up. But these fees are justified to help people avoid dynasty trust problems with an improperly executed document.

Life Insurance Inside a Dynasty Trust

Using life insurance within a dynastic trust can be a highly effective strategy to maximize your assets, minimize taxes, and preserve your legacy for future generations.

One of the benefits of being married is that you can avoid estate taxes until you and your spouse are gone. This means you can pass on your wealth to your heirs without paying taxes while alive.

However, when the second spouse dies, the estate may be subject to taxes depending on the size and value of the assets.

To protect your estate from taxes, you may want to consider a second-to-die life insurance policy. This coverage, which is also known as survivorship life, only pays your beneficiaries a tax-free death benefit after you and your spouse die.

By utilizing life insurance proceeds, you can effectively cover any estate taxes that may apply to your other assets, such as properties, stocks, or bonds.

Life insurance provides liquidity through its tax-free death benefit, allowing funds to be accessed without incurring potential income taxes when held in a dynasty trust.

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BUYING Second to die LIFE coverage

Having a financial planner who understands the role of life insurance in estate planning is essential.

It is important to choose guarantee policies that maximize the internal rate of return of the death benefit at life expectancy.

Survivorship universal life insurance is often recommended as it provides guaranteed lifelong coverage at an affordable price compared to other alternatives.

The chart below shows the annual premiums for a $1,000,000 second-to-die life policy, offering lifelong coverage to healthy couples.

Ages	Premium	Death Benefit
60/60	$10,100	$1,000,000
65/65	$13,200	$1,000,000
70/70	$18,200	$1,000,000
75/75	$24,100	$1,000,000

We highly recommend using our second-to-die insurance calculator to obtain more accurate quotes tailored to your situation.

It considers factors like age and the desired coverage amount, ensuring you receive the best options from top-rated insurers in today’s market.

Remember that these initial quotes may need customization based on your individual needs.

If you require further assistance or personalized guidance, don’t hesitate to get in touch with us at 877-249-1358 or fill out the provided form.

Take the first step towards second-to-die life insurance by starting your journey with us today!

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Dynasty Trust Pros and Cons

You have learned that dynasty trusts offer many advantages to affluent families, like asset management, support for future generations, and tax savings.

It is also necessary to weigh the downsides of perpetual trusts, including potential limitations on control over assets and restrictions on beneficiaries’ access to funds.

Before creating or changing a dynasty trust, it’s important to weigh the advantages and disadvantages carefully. This will help determine if this trust aligns with your estate planning goals.

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What are the benefits of a dynasty trust?

Asset management: A dynasty trust provides a means for managing assets to benefit your beneficiaries.
Support for future generations: Because many dynasty trusts do not have a set expiration date, they can leave a legacy for multiple generations.
Asset security: The assets inside the trust are not available to your creditors or the beneficiaries’ creditors.
Divorce Protection: You can protect trust assets in the event of a future divorce because trust assets belong to the trust, a separate legal entity for tax purposes.
Bypass double estate taxation: A perpetual trust’s assets will not be included in the estate tax calculations for your children’s, grandchildren’s, or future heirs’ estates because the trust assets remain in the trust, not your inheritors’ estates.

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What are the downsides to a dynasty trust?

Prolonged fiduciary commitment: The trustee must be able to serve in that role for an extended period, which is why a professional fiduciary is appointed to ensure continued professional management.
Lack of flexibility: Dynasty trusts exist for generations after your demise, meaning your ultimate goals may not be attained.
Loss of control: Once you transfer assets to a trust, you relinquish ownership and control of the assets to the trustee, who manages and distributes them under the trust document.
Costs and fees: Creating and managing any trust incurs expenses like legal, trustee, and accounting fees, as well as filing costs.
No outright allocations to beneficiaries: Your children, grandchildren, or other beneficiaries will not receive a lump sum inheritance under the trust. Instead, your trustee will distribute assets according to your trust document.

FAQ: Dynasty Trusts for Estate Planning

How much money is needed for a dynasty trust? The amount of money required to establish a dynasty trust varies based on individual circumstances and objectives. These trusts are commonly utilized by individuals with a net worth exceeding $12 million looking to preserve assets for multiple generations.

What assets are best to put in dynasty trust? Owning non-income-producing assets, such as growth stocks without dividends or tax-free municipal bonds, is best inside a perpetual trust. This strategy helps the trust avoid or reduce income taxes. Another option is to include a life insurance policy, which provides a tax-free death benefit.

Is a dynasty trust revocable or irrevocable? A dynasty trust is an irrevocable trust that cannot be altered or revoked once it has been funded. It is typically used when someone has a significant estate and wants to transfer wealth without incurring estate taxes.

What is the maximum length of a dynasty trust? The duration of a trust’s existence varies based on the laws of each state and the provisions outlined in the trust document. Some states have eliminated the rule against perpetuities, allowing dynasty trusts to last indefinitely. However, a few states still adhere to the traditional rule that limits trusts to 21 years after the death of the final beneficiary alive at the time of creation.