What is a Dynasty Trust?

A Dynasty Trust is an irrevocable trust drafted to avoid estate taxes for as many generations as applicable state law allows. Depending on how it is drafted and in which jurisdiction it is situated, the trust assets can also be protected from creditors, including divorcing spouses and bankruptcy.

How are Dynasty Trusts Drafted?

Many Dynasty Trusts are drafted as Beneficiary Controlled Trusts, which are trusts in which the primary beneficiary is either (i) the sole trustee or is

(ii) the investment trustee and serves with a co-trustee who has the power to make distributions and whom the primary beneficiary has the power to fire and hire. The beneficiary-controlled trust is designed to provide the primary beneficiary with all of the rights, benefits, and control over the trust property that he would have had if he owned it outright, in addition to tax, creditor, and divorce protection benefits that are not obtainable with outright ownership.

Why Dynasty Trusts?

This concept should not only be applied to the children’s generation but also to the grandchildren’s generation, the great-grandchildren’s generation, and more remote generations, depending upon the applicable state perpetuity restrictions. Many clients will choose to domicile the Dynasty Trust in the client’s home state, while others will select a superior state by adding a co-trustee from that jurisdiction. 

The superior state might include a longer perpetuity period, stronger creditor protection laws, state income tax savings, more flexible decanting statutes, and/or other more flexible laws. In order to domicile the Dynasty trust in another state, the trust agreement should include a co-trustee from that state. In many cases, this co-trustee will be a trust company or bank.

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