Dynasty Trust: The Right Strategy For Your Estate Plan?

A dynasty trust is a long-term trust designed to pass wealth down through the generations without incurring transfer taxes. Although this estate-planning vehicle can provide substantial benefits for individuals of high net worth or with family heirloom assets, it has some disadvantages as well. An experienced asset protection attorney can help you determine if a dynasty trust is the best strategy for your estate planning needs.

At DCDM Law Group in Pasadena, we offer professional legal guidance in asset protection and the estate planning process. With our detailed knowledge of financial instruments and sophisticated estate-planning strategies, we can help you plan for the benefit of future generations and protect your assets, both now and on into the future.

How Does a Dynasty Trust Work?

Transfers of wealth from one person to another are often subject to federal transfer taxes, such as the gift tax and estate tax. Transfer taxes are imposed on each generation (parent to child, child to grandchild), and even transfers that skip a generation (grandparent to grandchild) are covered by a special generation-skipping transfer (GST) tax. Many states, including California, also impose their own transfer taxes on gifts and bequests.

Altogether, taxes can take a significant bite out of your estate and the wealth that is being handed down, and will continue to do so every time a transfer is made to the next generation. Most high-asset individuals want to take action to avoid over-taxation, passing along the wealth to their own family members instead.

With a dynasty trust, the grantor transfers assets to the trust. This transfer may be subject to federal transfer taxes, but the estate tax exemption can be used to shelter the transfer. As of 2016, the individual estate tax exemption, as reported by the IRS, is $5.45 million for an individual. Married couples can shield $10.9 million from federal estate and gift taxes with this exemption.

After the initial transfer from the grantor, a dynasty trust continues to provide for future generations, with no additional transfers or transfer tax consequences, for as long as the trust exists. Although the assets held in the trust are not legally transferred (or taxed), they still move to the benefit of one generation from another.

Advantages and Disadvantages of Dynasty Trusts

If your estate planning involves substantial wealth, a dynasty trust may be your best strategy. The grantor has considerable discretion in establishing the terms of the trust. A dynasty trust can be structured to:

  • Minimize transfer taxes
  • Preserve wealth for generations
  • Protect assets from divorce, creditors and claimants, and spendthrift beneficiaries

Disadvantages of a dynasty trust include:

  • Trust is irrevocable — once it is funded, the grantor may not change the terms or control the assets
  • Future generations have limited flexibility when circumstances change

Legal Assistance with Asset Protection in Pasadena

If you have accumulated substantial assets, it is important to preserve those assets and plan for the future. Our knowledgeable asset protection attorneys at DCDM Law Group have the knowledge and skills to provide sound legal guidance and sophisticated strategic planning in advanced estate planning. Contact us to discuss your individual asset protection and estate planning needs.