Type of trust designed to avoid or minimize estate taxes
A dynasty trust is a trust designed to avoid or minimize estate taxes being applied to family wealth with each subsequent generation.[1] By holding assets in trust and making well-defined (or even no) distributions to beneficiaries at each generation, the assets of the trust are not subject to estate, gift or generation-skipping transfer tax (GST) taxes. Moreover, the wealth can be exempt from GST tax) if properly set up.
By its nature, a dynasty trust can run in perpetuity. Thus, it must be created in a state that either has no rule against perpetuities, such as Delaware or South Dakota, or has a very long perpetuities period, such as in Nevada (365 years) or Wyoming (1,000 years).[2] Dynasty trusts in the United States were created as a reaction to the imposition of the generation-skipping transfer tax on trusts. By keeping assets inside a trust for an extended period of time, wealthy families can by-pass taxes for several generations or even forever. This effect has been compounded by other favorable state laws that favor the wealthy, such as the elimination of state income taxation and other favorable conditions for managing wealth (such as "quiet trusts")[3] and asset protection.[4]
In 2018, as a result of the doubling of the GST tax exemption by the Tax Cuts and Jobs Act of 2017, very wealthy families in the United States seeking to shelter their wealth from future transfer taxes have taken a new interest in setting up dynasty trusts. As of January 1, 2020, the GST exemption is $11.58 million per person (and twice that for a married couple). Because this exemption (which is the highest ever) is scheduled to sunset on January 1, 2026, and could be repealed sooner depending on new legislation, the interest in dynasty trusts is steadily rising in 2020 just as it did in 2011 when there was a risk that the GST exemption could be severely reduced.[5]
^Madoff, Ray (11 July 2010). "America Builds an Aristocracy". The New York Times. Retrieved 2011-05-28.
^"What You Need to Know About a Quiet Trust". 22 April 2015.
^Robert H. Sitkoff and Max M. Schanzenbach (2005). "Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes". Yale Law Journal. 115: 356. SSRN 666481.
^Saunders, Laura (5 March 2011). "Dynasty Trusts Under Attack". The Wall Street Journal. Retrieved 2011-05-28.
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