What is a Dynasty Trust?

What is a Dynasty Trust?

by Richard C. Wilson & Family Offices Group Association Team

Question: What is a Dynasty Trust?

Answer: A large responsibility of a family office is to ensure a financially and tax-pain free transfer of wealth between generations and one way in which family offices might prepare for this generational transfer is to set up a dynasty trust.

A dynasty trust is created to pass wealth to multiple generations and avoid paying the generation-skipping transfer taxes and estate taxes at every transfer of assets from generation-to-generation. However, the trust is not subject to estate taxes until it expires. The trust is not tax-exempt from paying income taxes. Appreciation that occurs in the trust from the time the trust is funded is not subject to transfer taxes.

The grantor may choose to fund the trust annually in amounts up to the personal gift tax exclusion amount per each beneficiary, or grantors may also fund the trust with a lifetime gift up to the generation-skipping transfer exemption. Commonly, the dynasty trust is funded by a life insurance policy death benefit. Dynasty trusts are irrevocable.

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