A Dynasty Trust is a trust that may continue to exist indefinitely. In most states, a trust can only exist for a certain period of time. This time restriction is called the Rule Against Perpetuities, which requires that a trust must terminate no later than 21 years after the death person already living and named when the trust was created. The rule against perpetuities is, in fact, considered so complicated that some jurisdictions within the United States have determined that an attorney may not necessarily be liable for malpractice for a mistake based upon the rule.
The rule against perpetuities was originally developed to prevent wealthy families from using trusts as an indefinite tax-free transfer mechanism for their wealth. A few states have abolished the rule against perpetuities, instead establishing a set time limit for the existence of a trust. Other states have abolished any restriction to the time-length of a trust and now essentially allow some trusts to exist forever. Some individuals believe that future federal legislation may restrict this and establish lifespans for trusts.
BENEFITS OF A DYNASTY TRUST
The main benefit of a dynasty trust is that it can avoid federal estate taxes that might otherwise be paid at every generation, or every other generation. Because trust beneficiaries do not own an interest in the trust assets, the assets are not included in any of the beneficiaries’ estates. Without any estate tax liability, trust assets may grow faster than traditional estate-taxed methods. Estate taxes are often some of the highest taxes.
Dynasty Trusts include most of the same benefits available with other types of trusts, such as spendthrift clauses that protect trust assets from creditors of beneficiaries. The trust documents may also instruct the trustee as to the type or frequency of proper distributions, including incentives for a beneficiary reaching a goal and triggering a condition. The instructions may usually be tailored to a grantor’s specific objectives