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The Tax Benefits of Dynasty Trusts in Estate Planning

A trust can be one of the most critical parts of an estate plan. There are several types of trusts to choose from. Each serves different purposes and helps you achieve your goals for the future. 

Dynasty trusts are one common type. If you’re interested in determining whether a dynasty trust would be right for you, discuss your needs with a skilled estate planning attorney.

What is a dynasty trust?

A trust is a legal document that creates a fiduciary relationship between your chosen trustee and intended beneficiaries. The trustee holds certain property and assets for the beneficiary and only distributes them according to the trustor’s instructions. 

A dynasty trust is a long-term trust. It’s set up to pass along wealth from generation to generation without incurring “transfer tax,” like estate, gift, or generation-skipping transfer tax (GSTT). 

The beneficiaries of a dynasty trust are typically the trustor’s children, with their children and their children’s children benefiting in the future. Because a dynasty trust typically entails extensive assets, a bank or other financial institution is often chosen as a trustee.

The key distinction between the dynasty option and other types of trusts is the duration. Dynasty trusts are meant to remain active for many years. Heirs can receive assets from the trust, and the trust can stay “alive” so long as it is not depleted. 

Dynasty trusts do, however, have certain limits. Under the most current law, you can only fund a dynasty trust with up to $12.92 million worth of assets. Additionally, dynasty trusts are irrevocable. In other words, once you set up your trust, you cannot change the terms at a later date.

Dynasty trusts work well for individuals with significant assets who wish to pass on their wealth not only to their own children but to their children’s children as well. A dynasty trust attorney can help you determine whether this type of trust would work for you and your long-term goals. 

The Tax Benefits of a Dynasty Trust

One of the key features of a dynasty trust is the tax benefits it provides. Taxes are a substantial consideration when planning for the future, as there are several types of taxes that your estate is subject to pay. A dynasty trust can help avoid some of these tax implications.

Assets transferred into a Dynasty Trust are not subject to estate, gift, or GSTT taxes unless they exceed federal tax exemptions. However, income tax does still apply to a dynasty trust, though only if the assets produce income. For this reason, many trustors only transfer assets into dynasty trusts that do not produce any income.

Trustors receive tax benefits themselves after transferring assets into a dynasty trust, as these assets are removed from the trustor’s taxable estate. Because beneficiaries lack control over the assets in the dynasty trust, it does not count toward their taxable estates. 

Who’s responsible for taxes on a dynasty trust?

The trustor is responsible for paying taxes on their trust. Beneficiaries of a dynasty trust only pay income tax if they receive assets from the trust. GSTT taxes are deferred until the very last beneficiaries receive what’s left of the trust, and the trust is terminated. 

Schedule a Consultation With a Dynasty Trust Attorney

A dynasty trust can be a welcome addition to your estate plan. The first step, however, is determining whether this type of trust is right for you. 

Schedule a meeting with a dynasty trust attorney at OC Wills & Trusts. We proudly serve clients in Orange County, California, and the surrounding areas. Contact our firm today.

Brian Chew, the managing partner of OC Wills & Trust Attorneys, has extensive experience in the areas of estate planning, asset protection planning, business succession planning, long-term care planning, and veterans’ benefits. By devoting his practice to estate planning matters, he has founded a firm that strives to provide exceptional service to their clients by working closely with individuals and their families to create comprehensive and customized estate plans. For the past twenty five years, Brian has served thousands of clients in the matters of estate planning, wills and trusts. If you have any questions about this article, you can reach Brian Chew here.