Dynasty Trust in New York: Multigenerational Estate Tax Planning

A dynasty trust is a long-term, GST-exempt trust that keeps family wealth outside the taxable estate of every generation it serves. This page explains how New Yorkers fund one, what terms it should contain, and how New York’s perpetuities and income tax rules shape it.

Every estate plan we draft for a New York family has to answer the same question: when the assets pass to the next generation, do they go outright, or do they stay in trust? For families with wealth above the federal exclusion, or with children who will themselves be over New York’s exclusion, the answer is almost always “in trust,” and the longest version of that answer is a dynasty trust.

A dynasty trust is not a product or a gimmick. It is an ordinary irrevocable trust drafted to last as long as the law allows, with GST exemption allocated so that nothing inside it is ever taxed as it moves from children to grandchildren to great-grandchildren. The execution involves New York’s rule against perpetuities, New York’s income tax on trusts, a basis trade-off, and drafting choices that will govern a family for a century.

What a Dynasty Trust Is

A dynasty trust, sometimes called a legacy trust, is a GST-exempt trust designed to continue for multiple generations rather than to terminate and distribute when the children reach a certain age or die. Each generation can receive income and principal, live in homes the trust owns, and benefit from its investments, but no generation owns the assets in a way that puts them into its taxable estate. When a child dies, the trust simply continues for the grandchildren; when a grandchild dies, it continues for the great-grandchildren.

The difference between a dynasty trust and the GST trust we describe elsewhere is duration and intent. A GST trust is usually planned around the children, with a remainder to grandchildren. A dynasty trust is planned around the family as an institution.

The Compounding Advantage

Wealth left outright is taxed at every generation. A parent’s estate above $15,000,000 pays 40% federal estate tax; a New York estate above the cliff pays New York estate tax at rates up to 16%, with the New York tax deductible on the federal return (IRC § 2058) so that the combined top marginal rate is roughly 49.6%. Whatever survives is taxed again at the child’s death, then again at the grandchild’s, each round removing close to half of the amount above the exclusions.

A dynasty trust removes those rounds. The assets are taxed once, if at all, when they go in, and never again on the way down. Because nothing is skimmed off at each death, the trust compounds on its full value for as long as it lasts. Over three or four generations the difference between a taxed and an untaxed chain of inheritance is not a percentage; it is a multiple.

New York’s Rule Against Perpetuities and the Choice of Governing Law

New York still has a rule against perpetuities. Under EPTL 9-1.1, an interest in a trust must vest within lives in being at the creation of the trust plus 21 years, and New York separately prohibits suspending the power to sell trust property for longer than that same period. A dynasty trust governed by New York law can therefore last for the lifetimes of the family members alive when it is created, plus 21 years, and no longer.

A number of states have abolished the rule or extended it to a very long fixed term, and they allow a trust to last indefinitely. Delaware, South Dakota, Nevada and Alaska are the ones we see most often. A New York family can use those laws. The trust instrument selects the other state’s law to govern, a trustee located in that state administers the trust, and the trust holds intangible assets there. The family does not need to move.

Whether a perpetual trust is worth the cost of an out-of-state trustee is a judgment call. For a family whose horizon is grandchildren, a New York trust is more than enough. For a family that wants the trust to outlast anyone now living, one of the perpetual-trust states is the better choice. We help families make that decision on our New York dynasty trust attorney page.

Funding With the $15,000,000 Exemptions

A dynasty trust is funded with two exemptions working together. The federal gift and estate exclusion, $15,000,000 per person in 2026, allows the transfer to be made without gift tax. The GST exemption, also $15,000,000 per person (IRC § 2631), is allocated to the same transfer so that the trust has an inclusion ratio of zero (IRC § 2642). A married couple can therefore place $30,000,000 into a dynasty trust with no gift tax and no GST tax, and everything the trust earns thereafter is outside the transfer tax system. Both amounts are indexed for inflation after 2026 and there is no scheduled sunset.

The allocation is made on Form 709 (due April 15 of the year after the gift, or October 15 on extension). We allocate expressly rather than relying on the automatic allocation rules of IRC § 2632, and we describe the gift with adequate disclosure so that the three-year statute of limitations on its value begins to run. If the trust will hold more than the available exemption, the excess is placed in a separate non-exempt trust.

Typical Terms of a Dynasty Trust

The terms below appear in most dynasty trusts we draft. We discuss each at more length on our page on the typical terms of a New York dynasty trust.

• Discretionary distributions. An independent trustee may distribute income and principal to any descendant, in equal or unequal amounts, as the trustee sees fit.
• HEMS standard. Where a family member serves as trustee, distributions to that person are limited to health, education, maintenance and support, an ascertainable standard that does not cause estate inclusion.
• Trust protector. A non-beneficiary who can remove and replace trustees, change the governing law or situs, and amend administrative provisions as tax law changes over the decades.
• Decanting power. Authority for the trustee to pour the assets into a new trust with updated terms.
• Spendthrift clause. Beneficiaries cannot assign or pledge their interests, and creditors cannot attach them.
• Residence purchases. The trustee may buy a home and allow a beneficiary to live in it rent-free, keeping the residence in the trust rather than distributing cash that would enter the beneficiary’s estate.
• Incentive provisions. Distributions matched to earned income, support for education or a business, or restrictions during substance abuse or a divorce, if the family wants them.
• Power to grant a general power of appointment. Allows the trustee to cause estate inclusion for a beneficiary with a small estate in order to obtain a basis step-up, discussed below.

Grantor Trust Status and the Swap Power

During the grantor’s life, a dynasty trust is normally drafted as a grantor trust under IRC §§ 671–679, most often by giving the grantor a power to reacquire trust property by substituting assets of equivalent value (IRC § 675(4)(C)). That power makes the trust’s income taxable to the grantor without causing the trust assets to be included in the grantor’s estate (Rev. Rul. 2008-22). The grantor’s payment of the trust’s income tax is not a gift (Rev. Rul. 2004-64), so each year’s tax payment is, in effect, an additional tax-free transfer to the trust. The same status lets the grantor sell assets to the trust without recognizing gain, the technique behind the intentionally defective grantor trust.

The swap power also solves a basis problem late in life. Low-basis assets inside the trust can be exchanged for cash or high-basis assets of equal value from the grantor. The low-basis assets return to the grantor’s estate and receive a step-up at death (IRC § 1014).

Income Tax and Basis

After the grantor dies, the trust becomes its own taxpayer. Trust income tax brackets are compressed: a trust reaches the top federal rate at a small fraction of the income that would put an individual there. Distributed income is taxed to the beneficiaries at their own rates, so trustees often distribute taxable income to beneficiaries in lower brackets and retain growth assets or life insurance that generate little current income.

Basis is the trade-off. Assets in an irrevocable trust that are not included in anyone’s estate never receive a step-up (Rev. Rul. 2023-2). A trustee has tools to manage this: the swap power during the grantor’s life, and thereafter the ability to grant a beneficiary with a small estate a general power of appointment over enough trust property to absorb that beneficiary’s unused exclusions. The property is included, no tax is due, and the basis steps up. This “strategic inclusion” is a routine part of good administration. See our page on tax basis.

New York Considerations

• No gift tax. New York does not tax lifetime gifts, so funding a dynasty trust during life removes the assets from the New York estate as well as the federal one.
• Three-year add-back. Taxable gifts made within three years of death by a New York resident are added back to the New York gross estate (Tax Law § 954(a)(3)). Fund early.
• New York income tax on the trust. After the grantor’s death, New York taxes a resident trust’s income, but a trust created by a New York resident is generally not subject to New York income tax on its accumulated income if it has no New York trustee, no New York-situated assets, and no New York-source income. New York has throwback-style rules that tax a New York resident beneficiary when accumulated income is later distributed, so the benefit is strongest for income retained in trust and for beneficiaries who live elsewhere.
• The cliff at every generation. Because assets in the trust are not in any beneficiary’s New York estate, no descendant is pushed over the $7,717,500 cliff by the inheritance. See our page on the New York estate tax.

Pairing a Dynasty Trust With a Family LLC and Life Insurance

Two structures make a dynasty trust more powerful. The first is a family LLC. Instead of giving the trust cash or securities directly, the family places assets in an LLC and gives the trust non-controlling LLC interests. A qualified appraisal typically supports lack-of-control and lack-of-marketability discounts, commonly in the 20% to 40% range combined, so more value passes per dollar of exemption. The IRS scrutinizes these arrangements under IRC § 2036, so the LLC must have a business purpose and respect formalities.

The second is life insurance. A dynasty trust that owns a policy on the grantor’s life functions as an irrevocable life insurance trust with a multigenerational horizon. The death benefit arrives inside the trust free of estate tax and GST tax and provides liquidity when the grantor’s own estate may need to pay tax. See our ILIT page and family LLC page.

Who a Dynasty Trust Is For, and Pitfalls

A dynasty trust is for a New York family with wealth well above the exclusions, or with a business or real estate portfolio expected to grow to that level, that wants the wealth to remain in the family rather than be halved at each death. It also suits families that want descendants protected from creditors and divorce. It is not for a family whose children will need to spend the inheritance, or whose total wealth will never approach New York’s $7,350,000 exclusion; for them, the cost, the loss of the basis step-up and the loss of flexibility outweigh the tax saved.

• Exemption not allocated. A dynasty trust without an inclusion ratio of zero is a tax trap waiting for the first grandchild’s distribution.
• Mixed exempt and non-exempt property. Use two trusts.
• Retained control by the grantor. Powers that amount to retained enjoyment bring the assets back into the grantor’s estate under IRC § 2036.
• Choosing New York law by default. If the family wants a perpetual trust, the governing law and trustee must be chosen deliberately at the outset.
• Ignoring the basis cost. A trust with no power to grant a general power of appointment and no swap power forfeits step-ups that could have been free.
• A New York trustee when none was needed. Naming a New York resident as trustee can subject the trust’s accumulated income to New York income tax.
• Rigid terms. A trust meant to last a century needs a protector, a decanting power and a mechanism to change situs.

Related Estate Tax Planning Topics

• GST Trust – The single-generation version: lifetime trusts for children with remainder to grandchildren, and the New York savings at the child’s death.
• Generation-Skipping Transfer Tax – The 40% tax a dynasty trust is built to avoid: skip persons, taxable events and the inclusion ratio.
• Family LLC and Valuation Discounts – Moving discounted LLC interests into a dynasty trust to leverage the exemption.
• Irrevocable Life Insurance Trust – Using a GST-exempt trust to own life insurance across generations.

Plan Your Family’s Dynasty Trust With Us

We design dynasty trusts for New York families, select the governing law and trustee structure that fits the family’s horizon, prepare the Form 709 allocations that make the trust exempt, and coordinate with family LLCs, life insurance and the rest of the estate plan. To discuss whether a dynasty trust is right for your family, call 212-233-1233 or email [email protected].