You’ve worked hard to build your business from the ground up, and now you’re reaping the rewards. But have you ever wondered what will happen to your finances after you’re gone? If you’d like to share your wealth with future generations, consider dynasty trusts.
Below, learn about the benefits of creating a dynasty trust, as well as how to set one up for your descendants.
What Is a Dynasty Trust?
Typical trusts distribute wealth to just one or two generations (children and grandchildren, for example). Dynasty trusts, on the other hand, can last for many generations. A dynasty trust remains open until the last bit of wealth is distributed to beneficiaries. That means an inheritance for your great-grandchildren and beyond can be protected from being squandered by setting up a dynasty trust.
Dynasty trusts are a type of irrevocable trust. That means once you put assets into the trust, you can’t take them back out. This sounds rather restrictive, but it allows for significant asset protection and tax savings.
Who Are Dynasty Trusts For?
Unlike regular trusts, which anyone can set up regardless of how much money they have, dynasty trusts are largely economical only for high net worth individuals. That’s because the point of a dynasty trust is to pass down wealth to multiple generations. If you don’t have much wealth, the costs of maintaining the trust for multiple generations may outweigh the benefits and the funds in the trust will be exhausted sooner rather than later.
Benefits of Dynasty Trusts
One of the biggest benefitsof setting up a dynasty trust is the tax minimization your beneficiaries will enjoy. You pay gift or estate taxes on assets only once when they enter the trust, which means your beneficiaries won’t owe estate taxes on those assets when they’re distributed. Because many assets appreciate significantly over time, this transfer tax savings is a very appealing benefit. Care must be taken, however, to optimize the application of generation skipping tax exemption in order to minimize generation skipping transfer taxes.
Dynasty trusts also offer the creator of the trust a significant amount of control. You can choose your trustee and beneficiaries and dictate terms for how the trustee will distribute the funds.
How To Create Your Dynasty Trust
Your dynasty trust will last for generations, so it’s important to set it up properly. Here’s how to do it.
Consult With an Estate Planning Attorney
Dynasty trusts involve complex state and federal tax situations, so you’ll need to consult with an estate planning attorney who can explain the implications to you. Your attorney can also discuss asset protection strategies that will safeguard your wealth from creditors.
Name Your Beneficiaries and Choose Your Trustee
When it comes to choosing your beneficiaries, you can opt to leave wealth to children, grandchildren, great-grandchildren, other recipients, or a combination of these. The longer you want the trust to last, the more complex choosing beneficiaries becomes.
You will also have to choose a trustee to manage your trust. The trustee is responsible for safeguarding your assets and distributing them according to your terms, so choose wisely.
Decide Which Assets To Place in the Trust
You can place any assets you like into a dynasty trust, but some assets are better than others. Non-income-producing but appreciating assets, such as tax-exempt bonds and non-dividend-paying stocks, are ideal for dynasty trusts.
Real estate is another option. Many families use dynasty trusts to buy property with the intention of preserving these assets for future generations.
Determine the Distribution of Funds
Now comes one of the trickiest parts: deciding how you want the trustee to distribute funds. Will your beneficiaries need to meet certain requirements before they can inherit your wealth? For example, you might choose to distribute funds when a beneficiary marries or goes to college.
Such stipulations are called spendthrift clauses. They protect your wealth from being lost by irresponsible beneficiaries and taken by creditors.
Fund the Trust
You can choose to add funds to your trust while you’re still alive or at your death. Both of these choices have tax implications that can affect both you and your beneficiaries, so talk with an estate planning lawyer before you decide.
You could also claim certain exemptions depending on when you fund your trust. For example, the Tax Cuts and Job Act (TCJA) doubled the lifetime federal estate tax exemption (which is indexed for inflation and is, in 2024, about $13.6 million, but the increased exemption will expire (“sunset”-drop by half) in 2025 absent Congressional action. If you’d like to take advantage, it might be worth funding your trust before the increased exemption amount sunsets.
Protect Your Multigenerational Wealth for Future Generations
Want to learn more about dynasty trusts and determine whether they are right for your estate planning goals? Contact Wilson Ratledge, PLLC at (919) 787-7711 for your consultation now.