Dynasty Trust Pros and Cons

Brandi Joffrion

By Brandi Joffrion, Esq.


Families and individuals who have amassed enough wealth have turned to different trusts to pass on their net worth to their heirs. Trusts that are structured correctly can prevent the need to go through the probate process. Not all states permit the creation of dynasty trusts, but you are not required to create a trust in your home state. You may seek out a jurisdiction with friendlier laws, e.g. Wyoming. You should learn about the advantages and disadvantages of this type of trust before you commit to establishing one.

What is a Dynasty Trust?

As a form of an irrevocable trust, a dynasty trust extends well beyond the lifetimes of the grantor and beneficiaries. In some states, a dynasty trust can remain valid for 1,000 years to get around the rule against perpetuities. A dynasty trust permits the assets held in the trust to pay out to beneficiaries for several generations. The assets stay within a dynasty trust and outside a taxable estate.

Pros of a Dynasty Trust

A dynasty trust offers several benefits.

Asset Management

Like other trusts, a dynasty trust names a trustee to manage the assets for the financial benefit of the grantor's heirs. The trustee must honor the terms established by the grantor of a dynasty trust. This is an incredibly effective wealth-protection strategy for a grantor who has young children or grandchildren. You may use a public or private trust company for this role.

Financial Support for Subsequent Generations

Since a dynasty trust does not include a date when the trust is no longer legally valid, a grantor can leave a financial legacy for beneficiaries that last for several generations. A standard distribution provides for the support, healthcare, and education costs incurred by the selected beneficiaries.

Protects Assets

Perhaps the most significant benefit of establishing a dynasty trust is to protect your assets from your creditors and your beneficiaries' creditors. In addition to getting protection against creditors such as banks and credit card companies, a dynasty trust protects your assets from a lawsuit settlement. You also receive asset protection against a divorce settlement and a medical malpractice claim.

No Double Taxation on Your Estate

Death and taxes remain the two certainties of life, but by creating a dynasty trust, you limit the amount of taxes you have to pay at the state and federal levels. A dynasty trust established in a tax friendly jurisdiction avoids estate taxes in your home state, and can be used to minimize federal estate taxes via a step up in basis.

Cons of a Dynasty Trust

Establishing a dynasty delivers several financial benefits. However, you also have to consider a couple of drawbacks.

Prolonged Fiduciary Responsibilities

Because a dynasty trust can last in perpetuity, the trust might outlive every beneficiary and the initial trustee. One solution to this problem is to name a professional fiduciary like your bank's trust department. Although it is not guaranteed that your bank will outlive your trust, the chances are good that it will outlive your trustee and beneficiaries.

Inflexible Arrangement

A trust that has a fixed duration makes it easy to adjust terms to reflect changing conditions. That is not the case with a dynasty trust because since a dynasty trust is perpetual, adapting to one or more unpredictable events in the future is not an option. This could mean that your financial objectives might not get carried out according to your wishes.

For this reason we recommend drafting general principles, but not being overly strict. Being to strict is referred to as ruling from the grave. For example, a trust drafted in the 1980s that listed only specific industries that could be invested in would have missed the internet revolution as it would not have been thought of. For that reason guiding principles are more useful than strict conditions.

Opening a trust of any kind takes a considerable amount of planning, but this is particularly true if you want to establish a dynasty trust. Working with a family law attorney can help you decide if a dynasty trust is right for you. If you choose to open a dynasty trust, a lawyer can write the legal language that forms the foundation of the trust.