Written by Jayna M. Voss, JD
High-net-wealth individuals are turning to dynasty trusts, not only to avoid federal estate taxes but also to protect assets from general creditors and spendthrift heirs. Even those who do not have a taxable estate should consider a dynasty trust to preserve and grow wealth while ensuring that their loved ones are protected.
Many people are aware of the advantages of conventional trusts and incorporate them into their estate planning, but they often design the trusts so that assets pass outright to their children when those children attain certain ages or milestones. When a conventional trust distributes assets outright to the beneficiary, the distributed assets are includible in the beneficiary’s estate and possibly subject to estate tax when the beneficiary dies. If, after an outright distribution, the beneficiary goes through a divorce or has other creditors, those assets could be at risk. Family assets that are distributed to beneficiaries with no restrictions are often depleted by the third generation due to mismanagement or spendthrift heirs.
Dynasty trusts offer opportunities that conventional trusts with an ending date do not. Despite the benefits, clients often perceive dynasty trusts as only for affluent individuals who want to avoid taxes or rule from the grave. While the tax savings of a dynasty trust are undeniable, it can be used as a security blanket to ensure that assets are managed and distributed according to a family’s values while protecting future generations from creditors and predators. In modern-day estate planning, this is a common goal shared by many.
Essentially, a dynasty trust is an irrevocable trust established to set aside assets for future generations. Beneficiaries commonly include children and future descendants of the grantor. Discretionary income and principal distributions can be made for their benefit as determined by the trustee or a trust distribution advisor or committee. Because the beneficiaries do not have control over the trust assets, the assets are not includible in the beneficiaries’ estates and are generally protected from creditors’ claims. In some states, the assets can continue to be held in trust forever.
Tax Benefits
One of the most important advantages of a dynasty trust is the ability to preserve family wealth by preventing the assets from being subject to transfer taxes. If a client uses their federal gift (or estate) and generation-skipping transfer tax exemption to fund a dynasty trust, those assets will never be subject to transfer taxes. Any appreciation on those assets is also removed from the grantor’s estate. In 2025, the federal gift, estate, and generation-skipping transfer tax exemption is increased to $13.99 million due to inflation adjustments—the highest it has ever been. Essentially, a married couple could use their combined exemption of almost $28 million to establish dynasty trusts today and shield the entire amount from gift, estate, and generation-skipping transfer taxes. If the sunset occurs, the exemption will likely decrease to approximately $7 million per person (as adjusted for inflation) on January 1, 2026. Thus, the amount that an individual can pass tax-free to their heirs will decrease roughly by half in less than one year, making today the optimal time to do tax planning. Any excess will be subject to a top transfer tax of 40 percent.
Children and descendants can still access the assets in the dynasty trust at the discretion of the trustee, but the assets are not includible in their estates. This allows the family assets to appreciate without being subject to wealth transfer taxes at each generation. Today, high-net-wealth clients have a window of opportunity to lock in their historically high exemption amounts and transfer a substantial amount of wealth using dynasty trusts—but tax efficiency is not the only benefit.
Asset Management
Another advantage of a dynasty trust is the management and preservation of family assets. Clients who are concerned about children mismanaging or squandering their inheritance can use a dynasty trust, appointing a corporate or professional trustee to consolidate and manage the assets over multiple generations. If the grantor wants the family to be involved in management decisions, a child or beneficiary could be appointed as a trustee or co-trustee of the dynasty trust. Or in jurisdictions that allow directed trusts, an investment trustee or advisor could be appointed to manage the assets to provide continuity in the investment strategy.
Creditor Protection
Another important feature of a dynasty trust is the creditor protection it provides. In today’s world, a divorce, lawsuit, or catastrophic health event can be financially devastating. The dynasty trust can provide for multigenerational planning with both flexibility and a degree of control that protects heirs from creditors, divorce, and bad luck. A typical dynasty trust includes spendthrift provisions and allows only discretionary income—or even principal—distributions to the beneficiaries. Because the ownership of the assets remains in the dynasty trust and distributions are made only at the discretion of the trustee, the beneficiaries cannot force a distribution, and creditors generally cannot attach to the assets.
Incorporating Family Values
Some clients criticize dynasty trusts because they do not want their children to become “trust fund babies” who live off their inheritance. A dynasty trust can incorporate incentive provisions and family values to enhance but not hinder a beneficiary’s ambition to succeed on their own. For example, the grantor could . . .
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