When To Consider A Dynasty Trust
Trusts can be an attractive estate planning option to help people set out detailed instructions on how their property should be managed. A typical living revocable trust will name the grantor as a beneficiary and maybe list a surviving spouse and children as other beneficiaries. But some types of trusts, such as dynasty trusts, can help you provide for many more beneficiaries.
The estate planning lawyers at Loughlin Law, P.A. may be able to explain what a dynasty trust is and whether it might be a good fit for you. Consider contacting our firm at (561) 677-8384 to learn more.
What Is a Dynasty Trust?
A dynasty trust is a type of irrevocable trust designed to provide for multiple generations. Some dynasty trusts last for many years, maybe even forever. The major benefit of dynasty trusts is tax savings because they generate income that extends beyond a single generation.
How a Dynasty Trust Works
The grantor sets up the dynasty trust, usually with the help of an estate planning lawyer. The grantor funds the trust. The grantor can establish the rules and parameters they want about when distributions are made. They can also include a spendthrift provision and other terms to prevent the trust funds from being misused or diverted to purposes the grantor did not intend. The trustee is responsible for following the instructions in the trust.
The grantor can contribute up to the lifetime exclusion limit to the trust — which is $12.92 million under current tax law, according to the Internal Revenue Service — free of gift and estate taxes. The grantor can receive income generated by the trust, or the trust could name other beneficiaries. The trust may outline a number of future beneficiaries, too, such as the children and grandchildren of other beneficiaries.
Benefits of Dynasty Trusts
There are several benefits of dynasty trusts. The most pronounced are:
One of the most significant benefits of dynasty trusts is the potential to save on taxes, including:
- Gift tax – The grantor of the trust can make gifts to the trust that do not exceed the annual exclusion limit without incurring gift tax.
- Estate tax – The grantor can contribute to the trust up to the lifetime exclusion limit without incurring estate tax.
- Income tax – Beneficiaries do not pay taxes on the income generated from a trust. While there may be income taxes, the grantor could potentially avoid this by using instruments that do not generate income tax, such as non-dividend-paying stocks or tax-free municipal bonds.
- Generation-skipping tax – Sometimes when you make gifts to your grandchildren, you could incur generation-skipping taxes. Dynasty trusts are specifically designed to avoid these.
A dynasty trust may also help you avoid probate. When you pass away, any property you own that is in the dynasty trust is not considered part of your probate estate. Transferring this wealth out of your estate can save significant money during the probate process.
Another benefit of dynasty trusts is privacy. These trusts are privately administered. Therefore, grantors can have them managed according to their specifications without worrying about the public finding out about their terms. It is harder for people to scrutinize the activities involved in family dynasty trusts. Grantors can also make these arrangements privately without worrying about people learning about the money or property transferred into it.
Another significant benefit of dynasty trusts is that they can outlast many other types of trusts, which is crucial for grantors who want to provide for multiple generations. According to § 689.225, Fla. Stat. (2023), the trust interest must be created within 1,000 years of some person identified in the trust document to comply with the rule against perpetuities.
Drawbacks of Dynasty Trusts
One of the hallmarks of a dynasty trust is that it is irrevocable. This is necessary to obtain all the tax advantages and spendthrift protections. However, this can have some drawbacks that are worth considering, such as the following:
- They are less flexible.
- You lose control over the assets.
- They are more difficult to change.
Who Should Consider a Dynasty Trust?
Because dynasty trusts offer distinct tax advantages, they are a popular option for wealthy families who want to retain wealth within the family. Some types of people who might benefit from a dynasty trust include the following:
- Those who want to provide for a future generation
- Those who want to avoid generation-skipping taxes
- Those who have multiple generations to provide for
- Those who have significant taxable assets
Setting Up a Dynasty Trust
Because dynasty trusts are irrevocable and designed to last for many years, it is crucial to take the time and care necessary to create a trust that achieves the goals you want. Here are a few considerations:
- Naming beneficiaries – You may know who you want to be immediate beneficiaries of the trust, such as your children. However, you may want assistance in considering future beneficiaries to provide for and how to word this. For example, you might include grandchildren and great-grandchildren. You might include stepchildren, adopted children, and children born with medical assistance in the definition.
- Appointing a trustee – You will name a person to serve as a trustee to manage the trust property according to your instructions. However, since the trust is designed to last for many years, you may consider who should be a future trustee, whether you should use a professional trustee, and what to do if that organization is ever dissolved.
- Working with a competent legal professional – An experienced estate planning attorney with Loughlin Law, P.A. may be able to explain your options after discussing your needs and expectations for the trust.
Contact an Experienced Estate Planning Lawyer for Legal Guidance and Assistance
If you are wondering whether a dynasty trust is a good option for you, consider contacting an experienced estate planning lawyer at Loughlin Law, P.A. for help. A knowledgeable attorney may be able to explain how these trusts work and outline their advantages and drawbacks, as well as helping you set up a dynasty trust of your own. Learn more by calling the firm today at (561) 677-8384.