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What is a Dynasty Trust or Legacy Trust?

What is a Dynasty Trust or Legacy Trust?

A dynasty trust or a legacy trust is an arrangement that protects your family’s wealth for generations to come. The protection and preservation of family wealth has always been one of the main motivators of establishing a trust. To ensure that your children and grandchildren will be able to live and enjoy a comfortable life when you are long gone is a desire that every parent or grandparent has.

Establishing a dynasty trust or legacy trust aims to serve that specific goal by facilitating the transfer of wealth from one generation to another. A dynasty trust or legacy trust is a long-term trust that could be used by families with considerable wealth to avoid liability for transfer taxes.

For one to have a better understanding of what a dynasty trust or legacy trust is, we will be looking into its concept, purpose, and legal effects.

Dynasty or legacy trusts explained

A dynasty trust or legacy trust, which is also known as a “wealth trust,” is a type of irrevocable trusts whose defining feature is its purpose and duration.

The purpose of a dynasty or legacy trust is wealth transfer and preservation in favor of future generations. In order to serve its purpose, it is then necessary for it to last for a long time. As such, this type of trust usually has a very long duration. In fact, in some states, they can theoretically go on forever or be set up in such a way that it would last for a thousand years.

Moreover, a dynasty trust or legacy trust is also a type of an irrevocable trust. Hence, the terms and provisions of a dynasty or legacy trust can no longer be changed by the grantor. For instance, once the beneficiary is identified and selected in the irrevocable trust, the grantor would no longer have the power to change the designation later on. In other words, you are no longer allowed to change your mind about it. Thus, it would be as if the grantor has parted of whatever assets or property he has transferred in the irrevocable trust in favor of the beneficiary.

How long can it last?

As mentioned before, there are states that allow a dynasty trust to go on forever or have perpetual existence. Some states like New York, however, still maintains a “rule against perpetuities” which limits the duration of the existence of a trust.

Under New York state law, for example, a dynasty trust can survive for another 21 years even after the death of the last person (belonging to a class of people selected by the grantor) for whom the trust was set up for.

Tax benefits

Of course, preserving wealth and transferring it to the next generation would require the avoidance of taxes. This is what a dynasty trust or legacy is obviously for. Hence, the most common purpose of establishing a dynasty trust or legacy trust is to take advantage of its tax benefits such as:

1. Exemption from generation-skipping transfer tax (GSTT). The Internal Revenue Code imposes a federal tax known as a generation-skipping transfer tax (GSTT) which is levied on the transfer of assets to a descendant who is one generation below the grantor, as in the case of a grandparent gifting a grandchild. The tax is also applicable when the grantor gifts or transfers his assets to any person who is more than 37.5 years younger than he/she is. Also note that the GSTT is imposed on top of the federal gift and estate taxes.

Ordinarily, estate taxes would have to be paid when the grantor (e.g., a grandparent) passes assets and properties to their children when they die. Those assets and properties would also be subject to estate taxes when the grantor’s children die and pass it down to their own children (the grandchildren). Normally, this could be avoided if the grandparent would just gift the assets directly to the children or the “skip person.” But with the imposition of the GSTT, this method is no longer viable since it levies a considerable amount for the said gift to make up for the estate taxes that were not paid or collected (due to the fact that the assets did not pass through the parents).

This is where a dynasty or legacy trust would prove to be useful since you can designate your grandchildren as beneficiary of the trust and transfer the assets just the same. In this way, you will only have to worry about the gift tax on the initial transfer of the assets to the irrevocable trust.

2. Avoidance of multiple estate taxation. As discussed above, assets that you will pass on to your children, grandchildren, great grandchildren and so on, would be subject to estate tax for each generation that it has to pass through.

But if these assets are placed in a dynasty or legacy trust, they will not be counted as part of the beneficiaries’ taxable estate since they lack effective control over it (this is so even if they are entitled to the distributions from the trust). Hence, multiple instances of estate taxation could be avoided through the dynasty or legacy trust.

3. Lower valuation of assets. You will have to pay gift taxes when you transfer assets to the dynasty or legacy trust. But since the beneficiaries of the trust would not get to enjoy the assets right away (or it may be subject to other restrictions), the value of the gift for tax purposes would be much lower. This means that the gift tax due may become lower if it is coursed through a trust than if it was directly gifted to the intended beneficiary.

Other advantages

What makes a dynasty trust or legacy trust desirable as an estate planning tool is that it also offers other advantages aside from the common tax benefits. They are as follows:

1. Asset protection. Assets placed in an irrevocable trust is considered to belong to the trust. Legally speaking, it is no longer deemed part of the grantor’s properties nor even that of the beneficiary due to their lack of control over it. As such, your creditors and your beneficiaries’ creditors will be unable to touch the assets in the dynasty or legacy trust. In the same vein, the assets are also protected when family issues like divorce or claims for support would arise.

2. Asset preservation and management. As in most types of trust, a dynasty or legacy trust allows you to put your hard-earned assets and properties in the hands of a responsible trustee while your beneficiaries are still too young or immature to manage the same. By entrusting it to a capable trustee, you will be able to preserve and grow your assets and avoid its depletion due to irresponsible spending by extravagant or spendthrift beneficiaries.

3. Avoidance of probate. There would no longer be a need for probate since no will is involved and because you have already transferred your properties during your lifetime. It is now up to the dynasty or legacy trust to ensure that your beneficiaries will receive what is due to them.

Creating a dynasty or legacy trust

The inherent legal complexities and technicalities involved in the drafting or creation of a dynasty or legacy trust requires the knowledge and expertise of a seasoned and capable trust lawyer. This is not something that a layperson can competently do alone.

Consulting with a trust lawyer will ensure that your unique needs are taken into account in the drafting of the trust instrument. If you are looking for a qualified and experienced New York trust attorney to assist you in planning for your dynasty or legacy trust, you can call the Law Offices of Albert Goodwin at (212) 233-1233.