A Dynasty Trust is a trust that exists forever to be able to provide a legacy for current and future generations, and promote family values. A Dynasty Trust can be free of estate taxes and protect the assets from potential creditors. Dynasty Trusts can take the greatest possible advantage of a grantor’s gift tax exemption and generation-skipping transfer tax exemption. Not all states offer Dynasty Trusts.
How Long Can a Dynasty Trust Last?
In most states, trusts are subject to the Rule Against Perpetuities (“RAP”), which is a common law rule requiring a trust to terminate no later than the end of 21 years after the death of the last survivor of the class of persons who are alive at the time of the creation of the trust.
Many states allow a dynasty generation-skipping trust to have a duration longer than the common law RAP.
South Dakota allows for a trust to exist in perpetuity, i.e., for an unlimited duration.
Benefits of Unlimited Duration
Generation-skipping trusts in non-dynasty trust states without the longer or unlimited duration statutes maybe subject to disadvantageous tax and asset protection situations. When a trust is forced to terminate pursuant to the RAP (or by any mandatory termination provision in the trust agreement, or with distributions to beneficiaries at specific ages), the trust assets are distributed to the living beneficiaries of the trust. These distributions may be subject to wealth transfer taxation. Further, the distribution could be available to creditors of the beneficiaries. A Dynasty Trust in an unlimited duration state can endure for the longest possible time and circumvent additional death taxes on the trust assets at each generation. A Dynasty Trust should also maximize state income and death tax savings and asset protection.
Families also establish Dynasty Trusts for non-tax reasons. Senior family members can pass their values and goals on to younger generations via a Dynasty Trust.