Dynasty Trusts - The Basics

First of all, the question is "What is a Dynasty Trust, and why have one?"

The label "Dynasty Trust" evolved from people's desire to create a family dynasty, which probably caused estate planning lawyers to invent them.

The phrase might conjure up images of a large, wealthy family with a dominant parent who wants to keep the wealth sealed up inside the family forever. The term may bring to mind the proposition that either the patriarch or matriarch wants to control the wealth forever, even from beyond the grave.

Alternatively, and with a more generous viewpoint, the motivating principle of the dynasty trust is to never allow the government to get a crack at taxing the principal.

The Dynasty Trust can be set up as a Living Trust, a Testamentary Trust, or an Irrevocable Trust.

The word "living" is really a non-descriptive adjective. It probably comes from the fact that the trust is drafted and signed while the donor is alive.

The key element of a Dynasty Trust, which is usually incorporated into estate plans, is that it is amendable and revocable during the lifetime of the person who created it. Therefore the description often appears like this, "The Barry Solo Living Revocable Trust."

The power to revoke means that, like a will, it can be changed or completely revoked at any time up to death of the donor.

An irrevocable trust is one that cannot be changed after it comes into existence, unless there are some escape clauses written into the trust document.

The main objective of a Dynasty Trust is to have the trust continue for as long as possible and to benefit several succeeding generations following the death of the trust's original donor. Often, this is achieved by providing that during the lifetimes of the grantor's children, grandchildren, and great-grandchildren, etc., each set of beneficiaries receive the income from the trust, with the principal staying intact to provide an income stream for future generations.

The description above is a simplification of the numerous possible variations in the design of a dynasty trust. However, if the basic plan is followed, then as each generation dies, there will be no estate tax on the principal, which continues intact to produce income for the next set of descendants of the original grantor.

In the majority of cases the family will want to have some means of ending the trust and distributing the principal. This can be achieved by a provision allowing certain, or all, of each generation to use a limited power of appointment to distribute a part of the principal to a specific class of beneficiaries, such as children, nephews, nieces, siblings, spouses or other clearly specified groups or individuals. If the power is to give all of the money away to anyone, then the person who has been given that power, even if he does not use it, will have a general power of appointment for estate tax purposes, and the whole of the principal value will be taxed in the estate when he dies.

There are other basics to consider in deciding whether to use a Dynasty Trust. The description above is only a general introduction to the principle of a dynasty trust. It should be noted that the Dynasty Trust is not just for the wealthy. It can be extremely useful for families where younger members need some strings attached to their use of the family wealth when their parents, whether because of special needs situations, credit problems, or just to be protected from requests of other family members, are unavailable for financial help.