The Dynasty Trust: Because “Forever” is a Great Tax Bracket
If you’ve ever watched a period drama and wondered how the Duke of Somewhere-or-Other keeps a 200-room manor despite not having a real job since the 1700s, you’ve seen the magic of generational wealth. In the American tax system, the Dynasty Trust is our version of that aristocratic staying power—minus the powdered wigs.
What is it, exactly?
In the old days, there were laws called “Rule Against Perpetuities” which meant trusts had to eventually end—usually around 90 years. But several savvy states decided that approach was too much “giving back” to the government. They abolished those rules, allowing a trust to live, theoretically, forever. And many more states have since joined this party as they all compete for trust assets.
Estate taxes are technically a “transfer tax”. Meaning you pay that tax every time the assets are “transferred”, i.e. passed on to the next generation. So over time these assets could be severely diminished by a substantial tax at each generation.
In layman’s terms, a Dynasty Trust is a forever trust. You put assets in today, and it stays there for your children, your grandchildren, and your great-great-grandchildren and beyond. The beauty of the Dynasty Trust is the avoidance of the transfer tax. It bypasses this tax at each generation’s passing.
Estate taxes are technically a “transfer tax”. Meaning you pay that tax every time the assets are “transferred”, i.e. passed on to the next generation. So over time these assets could be severely diminished by a substantial tax at each generation.
In layman’s terms, a Dynasty Trust is a forever trust. You put assets in today, and it stays there for your children, your grandchildren, and your great-great-grandchildren and beyond. The beauty of the Dynasty Trust is the avoidance of the transfer tax. It bypasses this tax at each generation’s passing.
The Infinite Loophole
By placing assets in a Dynasty Trust:
- The IRS is Invited Once: You use your gift tax exemption to fund it (currently $15 million/person or $30 million for a couple).
- The Growth is Forever: Once the money is in, it can grow for centuries.
- Generation-Skipping: The assets are never technically "owned" by your descendants; they are just "beneficiaries." Since they don't own the assets, the IRS can't tax the estate when they pass away.
- Insurance Leverage: Often times, life insurance is used to leverage up the amount in the Dynasty Trust. For example, taking $3 million of the gift to acquire $15 million of coverage. When the donor passes, $15 million of proceeds is deposited in the Trust, tax-free.
The Reality of Forever
In effect, you are essentially ruling from the grave. You get to decide today if your great-great-granddaughter can use the money for a PhD in Lunar Archaeology or if she has to wait until she’s thirty. It’s the ultimate way to ensure your descendants remember your name—mostly because they have to ask your hand-picked trustee for permission.
The Dynasty Trust has been referred to as the “family bank”. Example being your great-great grandson has a brilliant idea for a business. Why go to the bank for a loan when he can go to the “family bank” for his seed money?
Dynasty Trusts are a strategy for those who think in generations rather than fiscal quarters, ensuring that while the family tree grows, the tax bill stays remarkably stunted.
The Dynasty Trust has been referred to as the “family bank”. Example being your great-great grandson has a brilliant idea for a business. Why go to the bank for a loan when he can go to the “family bank” for his seed money?
Dynasty Trusts are a strategy for those who think in generations rather than fiscal quarters, ensuring that while the family tree grows, the tax bill stays remarkably stunted.
Navon Wealth does not give tax/legal advice and encourages clients to seek such counsel.