What's with a Dynasty Trust?

co-authored by Rob Hugos, JD, CPA, LLM (Tax)

Rob Hugos is a board-certified estate planning attorney at Texas Trust Law and earned his LL.M. in taxation from NYU School of Law.

What Is a Dynasty Trust?

Everyone seems interested in making and keeping as much money as they can. A dynasty trust is a special kind of legal arrangement that helps families pass down money and property from one generation to the next. It’s designed to last for many years—sometimes forever—and can protect family wealth from taxes, creditors, and poor financial decisions.

Why Do People Use Dynasty Trusts?

Many families lose their wealth over time. Studies show that 70% of family wealth is gone by the second generation, and 90% by the third. The concept is called “shirt sleeves to shirt sleeves in three generations.” A dynasty trust can help avoid this by keeping money in a protected account that follows strict rules.

Here are the main reasons people use dynasty trusts:

• Avoid Certain Taxes: Normally, when you give money to your children or grandchildren, you might have to pay estate or gift taxes. A dynasty trust can help avoid these taxes.

• Protect Assets: The trust can be designed to keep the money safe from lawsuits, divorces, and bankruptcy. The official name of this type of trust is a “spendthrift trust.”

• Control How Money Is Used: The person who creates the trust (called the grantor) can set rules for how and when the money is given to family members, who can then control it themselves, or someone else, typically a trust company, can control it for them.

How Does It Work?

A dynasty trust is a type of irrevocable trust, which means once it’s created, it cannot be changed easily. The grantor puts money, property, or investments into the trust. Then, a trustee—a person or company—manages the trust and follows the rules set by the grantor.

The trustee decides when and how to give money to the beneficiaries. These beneficiaries are usually the grantor’s children, grandchildren, and future descendants.

Where Can You Set One Up?

Not every state allows dynasty trusts to last forever. Some states have laws called the “rule against perpetuities,” which limit how long a trust can last. But states like Delaware, Nevada, and South Dakota allow dynasty trusts to continue for many generations. Texas now has a 300-year statute! Try to imagine what was happening in 1725, and that will give you an idea of how long a Texas trust can last.

What Are the Benefits?

• Tax Savings: If set up correctly, the trust avoids estate, gift, and generation-skipping transfer taxes. To put it another way, the money does not skip generations, the taxes do, so the IRS does not get to render a tax on the trust’s assets at every generation.

• Asset Protection: The money in the trust is not owned by the beneficiaries; it is trust property. A significant advantage of a dynasty trust is that it is drafted to keep the assets safe from creditors and divorce settlements.

• Long-Term Planning: The trust can include rules about education, age milestones, or responsible behavior before giving out money, although some of these types of provisions can add unnecessary complexity to it.

• Professional Management: Many families often choose banks or trust companies to manage the trust to make sure it is administered properly.

Are There Any Downsides?

Yes, there are a few things to think about:

• Cost: Setting up and managing a dynasty trust can be expensive, but so can generations of taxes.

• Complexity: These trusts are complicated and need help from expert lawyers, qualified financial advisors, and CPAs.

• Loss of Control: Once the trust is created, the grantor cannot take the money back or change the rules easily; the trust will also be required to file a special tax return annually and could pay higher income taxes.

Who Should Consider a Dynasty Trust?

Dynasty trusts are usually used by high-net-worth families—people with a lot of money or property. But even families with moderate wealth might benefit if they want to protect their assets and make sure the property stays in their bloodline. In-law issues can also be addressed.

Final Thoughts

A dynasty trust is a powerful tool for families who want to protect their wealth, avoid taxes, and make sure future generations are financially secure. While it’s not for everyone, it can be a smart choice for those who want to leave a lasting legacy.