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By: Wilmington Trust
A dynasty trust is an irrevocable trust designed so that it may stay in effect for multiple generations, creating a powerful estate planning tool for high-net-worth families.
Assets placed in a properly designed trust can continue for generations without being subject to estate, gift, or generation-skipping transfer (GST) tax.
Most states limit the duration of a trust to anywhere from 80 to 110 years; such limits stem from a centuries-old common law doctrine known as the "rule against perpetuities." But Delaware and several other states have enacted laws that remove virtually all limits on a trust's duration. One exception is that Delaware imposes a 110-year limit on real estate in a dynasty trust.
Still, the near absence of limits means that a dynasty trust can continue forever, producing income and capital gains for one's descendants over many generations. In addition, Delaware does not impose state income tax on capital gains or accumulated income in trusts where no beneficiaries reside in Delaware.
For these reasons, it is conceivable that assets placed in a dynasty trust in Delaware will grow substantially over many decades.
Options to consider
A dynasty trust can be funded in two ways: during one's lifetime or upon death. Often, it is better to opt for lifetime funding, since this is likely to provide for assets to grow during your lifetime, but the appreciation will be out of your taxable estate. In addition, the tax impact is likely to be less with lifetime funding.
Another factor that people must consider is the type of assets to place in a dynasty trust. Since these trusts allow assets to grow significantly, stocks and life insurance policies are good vehicles to think about.
An additional factor to consider is that you can include incentives, such as distributions that match annual earned income, to encourage future generations to avoid the temptation to live solely off of the trust assets.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.