Typical Terms of a Dynasty Trust in New York

Dynasty trusts are powerful estate planning tools that allow wealthy individuals to create a lasting legacy by transferring assets to future generations while minimizing tax liabilities. These trusts offer unique benefits, such as asset protection, tax reduction, and the ability to influence beneficiaries' behavior over a long period. In this article, we will explore the typical terms of a dynasty trust in New York, including beneficiaries, irrevocability, duration, tax considerations, trustee responsibilities, and distribution terms.

Beneficiaries

Original beneficiaries of a dynasty trust are typically the grantor's children. The grantor names their children as the initial beneficiaries of the dynasty trust, and children can receive distributions from the trust according to the terms set by the grantor. For example, the grantor's two children, X and Y, are named as the original beneficiaries of the dynasty trust. After the death of the grantor's children, grandchildren and possibly great-grandchildren become beneficiaries. Once the grantor's children pass away, the trust assets are passed down to the next generation. Grandchildren become the primary beneficiaries of the trust after their parents' death, and great-grandchildren may also be included as beneficiaries, depending on the trust's terms. For instance, after X and Y's death, their children (the grantor's grandchildren) A, B, C, and D become the trust's beneficiaries. Dynasty trusts are designed to span multiple generations, providing for the grantor's descendants. The trust can continue to distribute assets to great-grandchildren and beyond, depending on the duration of the trust. As an example, the dynasty trust continues to provide for A, B, C, and D's children (the grantor's great-grandchildren) and possibly their grandchildren as well.

Irrevocability

Once the grantor establishes and funds the dynasty trust, they relinquish all control over the assets. The grantor cannot make changes to the trust's terms, beneficiaries, or distributions. Irrevocability ensures that the trust is not considered part of the grantor's estate for tax purposes. For example, after creating and funding the dynasty trust, the grantor, A, cannot decide to change the beneficiaries or alter the distribution terms. The trust is controlled by an appointed trustee. The grantor selects a trustee to manage the dynasty trust and its assets. The trustee has the responsibility to follow the trust's terms and make decisions in the best interest of the beneficiaries. Trustee duties include managing investments, making distributions to beneficiaries, and ensuring the trust complies with legal requirements. For instance, A appoints his long-time friend and financial advisor, B, as the trustee of the dynasty trust. B takes control of the trust's assets and makes decisions based on the trust's terms and the beneficiaries' best interests. The grantor can provide guidance to the trustee through a letter of wishes, but the trustee is not legally bound to follow these instructions. As an example, A writes a letter of wishes to B, expressing his desire for the trust to prioritize funding the beneficiaries' education and encouraging charitable giving. B considers these wishes but makes decisions based on the trust's terms and his fiduciary duty to the beneficiaries. Because the letter of wishes is not embodied in the trust document, these directives are not mandatory.

Term

Dynasty trusts can survive for 21 years after the death of the last person for whom the trust was established. This means that dynasty trusts can continue to exist for up to 21 years after the death of the last beneficiary who was alive when the trust was created. This rule, known as the "Rule Against Perpetuities," limits the duration of dynasty trusts in most states, including New York. For example, if the grantor's youngest grandchild, Olivia, was alive when the trust was established and outlives all other beneficiaries, the trust can continue to exist for up to 21 years after Olivia's death.

Theoretically, dynasty trusts can exist for more than 100 years. Given the potential longevity of the beneficiaries and the 21-year period after the last beneficiary's death, a dynasty trust can span multiple generations. If the grantor creates the trust when their children are young, and the children and grandchildren live long lives, the trust could potentially last for over 100 years. For instance, if the grantor, A, creates the dynasty trust when his children, B and C, are in their 20s, and they live to be 90 years old, the trust would have already lasted for approximately 70 years. If B and C's children (A's grandchildren) live to be 95 years old, and the trust continues for 21 years after the death of the last grandchild, the total duration of the trust could be around 116 years (70 + 25 + 21). Some states have abolished the Rule Against Perpetuities, allowing dynasty trusts to exist indefinitely, but New York still adheres to the rule. For example, if A created the dynasty trust in a state without the Rule Against Perpetuities, the trust could continue to benefit his descendants for generations, potentially lasting hundreds of years, as long as the trust is properly managed and funded.

Tax considerations

Dynasty trusts can be an effective way to minimize estate and gift taxes. By transferring assets into a dynasty trust, the grantor removes those assets from their taxable estate, potentially reducing estate tax liability. Additionally, when beneficiaries of successive generations inherit the trust assets, they are not subject to estate taxes, as the assets are not considered part of their taxable estates.

Grantors can take advantage of annual gift tax exclusions and their lifetime gift tax exemption when funding the dynasty trust during their lifetime. This approach helps to minimize gift taxes. In 2024, for instance, a grantor could transfer up to $13.61 million (the lifetime gift tax exemption amount) into a dynasty trust without incurring gift taxes.

It's important to note that dynasty trusts may be subject to the generation-skipping transfer tax (GSTT) if distributions benefit grandchildren or later generations and exceed the GST exemption. In 2024, the GST exemption is also $13.61 million, which is separate from but equal to the lifetime gift tax exemption. Understanding the distinct purposes of these exemptions is crucial for effective estate planning with dynasty trusts.

Trustee responsibilities

The grantor selects a trusted individual or institution to serve as the trustee of the dynasty trust. The trustee can be a family member, friend, attorney, financial advisor, or professional trust company. The grantor should choose a trustee who is responsible, financially savvy, and aligned with the grantor's values and goals. The grantor can also name co-trustees or successor trustees to ensure continuity in trust management.

The trustee assumes full control over the dynasty trust and its assets once the grantor funds the trust. The trustee is responsible for managing the trust's investments, making distributions to beneficiaries, and ensuring the trust operates in accordance with its terms and applicable laws. The trustee must act in the best interests of the beneficiaries and exercise reasonable care and skill in managing the trust.

The trustee must keep accurate records of the trust's transactions, investments, and distributions, and provide regular reports to the beneficiaries. Detailed records of the dynasty trust's activities must be maintained and quarterly reports must be provided to the beneficiaries. The trustee is also responsible for filing tax returns on behalf of the trust and ensuring that any taxes owed are paid in a timely manner.

Distribution terms

Distribution terms of a dynasty trust can be designed to incentivize certain behaviors from heirs over a long period. The grantor can include provisions in the dynasty trust's terms that encourage or require beneficiaries to meet specific goals or engage in certain behaviors. These incentives can be tailored to the grantor's values, such as promoting education, entrepreneurship, philanthropy, or personal responsibility. For example, the grantor includes a provision in the dynasty trust that offers additional distributions to beneficiaries who earn a college degree, with even greater rewards for those who pursue advanced degrees. The trust can also include incentives for beneficiaries who start their own businesses, engage in charitable work, or maintain full-time employment.

Incentives can also be designed to discourage certain behaviors, such as substance abuse or excessive spending. The grantor can include a clause that suspends distributions to any beneficiary with a documented substance abuse problem until they complete a rehabilitation program and maintain sobriety for at least one year. By tying distributions to specific behaviors or achievements, the grantor can encourage positive actions and discourage negative ones over multiple generations. .

Dynasty trusts also help protect assets and the grantor's reputation. They can protect the trust's assets from beneficiaries' creditors, legal claims, and potential mismanagement by including credit protection and spendthrift provisions. By keeping the assets within the trust and under the control of the trustee, the trust can provide a layer of protection against beneficiaries' financial missteps or legal troubles. If, for example, one of the beneficiaries is sued for negligence in a car accident, the assets in the dynasty trust are generally protected from any legal judgment against him.

Setting up and maintaining a dynasty trust can be complex and costly due to legal and administrative expenses. Keeping a trust going indefinitely can present challenges, such as finding capable trustees and ensuring the trust's purpose remains relevant over time. However, it can also result to substantial savings over time if structured properly. Should you need assistance in establishing a dynasty trust, the Law Offices of Albert Goodwin is here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].