What Is a Dynasty Trust?

A dynasty trust is a long-term trust created to pass wealth from generation to generation without incurring transfer taxes—such as the gift tax, estate tax, or generation-skipping transfer tax (GSTT)—for as long as assets remain in the trust.  

Rules

Historically, many states had a rule against "perpetuities" and stipulated when a trust had to end. A common rule was that a trust could continue for 21 years after the death of the last beneficiary alive when the trust was established.Under those circumstances, a trust could theoretically last for 100 years or so.

Some states, however, allow wealthy individuals to create dynasty trusts that can endure for many generations into the future. A dynasty trust is a type of irrevocable trust. Grantors can set rules for how the money will be managed and distributed to beneficiaries. Once the trust is funded, the grantor will not have any control over the assets or be permitted to amend the trust's terms. The same is true for the trust's future beneficiaries.

Beneficiaries

The immediate beneficiaries of a dynasty trust are usually the grantor's children. After the last child's death, the grantor's grandchildren or great-grandchildren generally become the beneficiaries. The trust's operation is controlled by a trustee whom the grantor appoints. The trustee is typically a bank or other financial institution.

Taxes

Assets transferred to a dynasty trust can be subject to gift, estate, and GSTT taxes only when the transfer is made and if the assets exceed federal tax exemptions. However, income taxes apply to a dynasty trust if assets produce income. Therefore, individuals often transfer assets to dynasty trusts that don't produce taxable income to minimize the income tax burden, such as non-dividend paying stocks and tax-free municipal bonds.

Additionally, the assets that go into a dynasty trust and any appreciation on those assets are permanently removed from the grantor's taxable estate, providing another layer of tax relief. A trustee can distribute money from the trust to support beneficiaries as outlined in the trust terms. Because beneficiaries lack control over the trust's assets, it will not count toward their taxable estates. Similarly, the trust's assets are protected from claims by a beneficiary's creditors because the assets belong to the trust, not the beneficiary.

The Bottom Line

Individuals with significant taxable assets in the estates benefit the most from dynasty trusts. The dynasty trust becomes the asset owner, so the assets are not included in the estate when the grantor dies. In 2024, an individual can put up to $13.61 million in a dynasty trust.