About Dynasty Trusts

Dynasty trusts are long-term tax shelters that were created to protect inheritances and legacies from the Internal Revenue Service. Although anyone can set up a dynasty trust, it is mostly taken advantage of by the very wealthy to ensure that the money stays in the family rather than going to public coffers.

Identification

Dynasty trusts are designed to withhold assets without direct ownership transferring to any specific inheritor. Over time, the trust is distributed from assets that are held in the trust to each succeeding generation of the person who created the trust. The assets of the trust are valued at the amount of worth when the trust was created, but only as long as they remain the trust. If an appreciation is engendered, current laws typically make it exempt from estate taxes.

Time Frame

The time frame of the dynasty trust can remain in place in perpetuity under certain circumstances. As long as there are assets in the trust and generations to distribute the wealth to, the dynasty trust can continue paying off--that is, as long as there are no trust perpetuity laws at work in the state. Many states limit a dynasty trust to between 80 and 110 years.

Creditors

The assets of the dynasty trust do not actually belong to the beneficiaries. Therefore, they are not subject to claims from creditors. A special case involves the establishment of a dynasty trust in Delaware by residents of a different state. In this case, the assets are not even subject to Delaware taxes. Check with the laws of the resident state, however, to make sure the trust cannot be taxed there.

Trustee

One of the most important things to consider when creating a dynasty trust is choosing a trustee. Remember that trust could potentially be distributing assets for over a century, meaning that even if you were to choose a child or trust friend to handle it, that person, too, would be dead long before the trust becomes depleted. A corporate trustee well experienced in handling legacy devices like this is probably the most ideal choice for management of the dynasty trust.

Types of Assets

Dynasty trusts should be funded with tax-free income such as certain municipal bonds, non-dividend growth stocks, and cash-rich life insurance rather than tax-heavy income. Remember that the assets are taxed at a flat 39 percent rate, so placing taxable assets within it can incur hefty annual taxes over the life of the trust.

Provisos

As with any other kind of trust, certain provisos and limitations can be written into the dynasty trust. For instance, you might want to insist that descendants graduate high school or college. You can even ensure that beneficiaries are restricted from receiving distribution if they violate certain terms such as being sentenced to prison.