
What is a Dynasty Trust?
A Dynasty Trust is a type of trust that is set up to minimize or defer estate taxes for multiple generations of a family. Hence the name dynasty trust.
It enables a family to hold and manage its assets in a trust to pass these assets down to its heirs such that estate taxes or other taxes are not imposed on the assets with each new generation.
The Lifespan of a Trust
Depending on the jurisdiction, trusts are generally allowed to have a lifespan of about 21 years to an unlimited timeframe. Trusts that have an unlimited timeframe are called perpetual trusts.
Each jurisdiction sets its own laws that govern its trusts. Some examples include:
United States
In the state of Nevada, trusts can have a lifespan of 365 years.
In the state of Wyoming, a trust can have a lifespan of 1,000 years.
In the state of Delaware, a trust can have an unlimited lifespan.
Canada
In the province of Ontario, the assets of a trust are deemed to be disposed of after 21 years. However, this 21-year rule does not automatically dissolve a trust. The trust law deems that the assets are disposed of and the assets are automatically re-acquired immediately thereafter. Thus, the trust incurs a taxable capital gain on its assets on the 21st birthday of the trust as if the assets had been sold. A capital gains tax becomes due and payable to the tax authorities and the after-tax assets remain in the trust. And the trust itself continues indefinitely.
In the province of Prince Edward Island, a trust can exist to the life of the last beneficiary, plus 60 years.
Offshore Trusts
Trusts can be set up in offshore jurisdictions as well. Each jurisdictions has its own rules such as:
In the Bahamas, a trust can have a lifespan of 150 years.
In Jersey, a trust can have an unlimited lifespan.
Objective of a Dynasty Trust
The objective of a dynasty trust is for the trust to last for as long as possible. Thus, it is best to set up a dynasty trust in a jurisdiction where the lifespan of a trust is not limited.
Dynasty trusts in the U.S. are a tax planning vehicle to help families minimize or avoid the generation-skipping transfer tax on trusts. Trusts enable families to avoid estate taxes.
In the U.S., as of 2022, a 40% estate tax is applicable to assets over $12.06 million for an individual and $24.12 million for a married couple.
The Mechanics of a Dynasty Trust
A dynasty trust is usually set up by a family to manage and distribute its assets over multiple generations.
The patriarch of the family (Trustor) places his assets in a trust. The trust is managed by a corporate trustee, an attorney, or family member. And his children and grandchildren are beneficiaries of the trust.
A dynasty trust is an irrevocable trust. This is a trust that does not allow the Trustor or beneficiaries to change its terms.
In a trust agreement, the Trustor will detail how the assets in the trust are to be managed and distributed to the beneficiaries. And then the Trustor will have no control of the assets. The trustee will manage the assets as set out in the trust agreement.
When a Trustor transfers his assets to a trust, the trust is the legal person or entity that now owns the assets. This means that even if the Trustor or his beneficiaries are faced with a lawsuit, divorce, or a creditor claim on their assets, those assets are outside of the reach of any claimants.
As such, the trust provides asset protection to multiple generations of family members as well.
And because the assets are owned by the trust and not the Trustor or his beneficiaries, they are not included in the taxable estate of the Trustor or his beneficiaries.