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What is a dynasty trust?

If you are a reasonably well-to-do Californian, you likely already have an estate plan in place or are currently constructing one. If you have established one or more trusts as part of your plan, most if not all of them probably are revocable. As you continue to accumulate wealth, you can therefore revoke most of your trusts and establish others. You may want to start thinking about establishing a dynasty trust.

Sontag Advisory explains that a dynasty trust is a special kind of irrevocable trust that remains in effect forever. “But how,” you ask, “does a dynasty trust get around the Rule Against Perpetuities, that old bugaboo legal doctrine that holds that trusts must not last forever?”

The answer lies in how you and your attorney and financial advisor construct and word the trust. Dynasty trusts are highly sophisticated documents, requiring the combined efforts of highly knowledgeable and financially sophisticated people. This definitely is not a DIY project.

Dynasty trust advantages

Your dynasty trust can provide advantages not only to you, but also to your family members for all generations to come. Some of the most important benefits include the following:

  • Protection of family values
  • Protection from taxes
  • Protection from creditors

Family values

If you and your spouse are like most people, you do everything possible to instill family values in your children. Your dynasty trust can help you do it. For instance, it can contain incentives to induce your beneficiaries to become and remain productive members of society.

Taxes

When you fund your dynasty trust, your contributions to it are subject to gift taxes. You can, however, avoid the actual imposition of those taxes by transferring assets having a total value of the remaining portion of your lifetime gift tax exemption. Furthermore, if you and your spouse establish the dynasty trust together, that exemption effectively doubles.

You also need to be aware of structuring your dynasty trust so as to avoid the generation-skipping transfer tax. Once again, however, both you and your spouse have lifetime exemptions, generally equal to the amount of your respective gift tax exemptions.

Creditors

Another huge advantage to a dynasty trust is that you can structure it in such a way that your creditors and those of your children, grandchildren, and on down the family line can never touch them.

All in all, a dynasty trust may just be the estate planning tool you have been looking for.

This is general educational information and not intended to provide legal advice.

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