Dynasty Trusts

What Is a Dynasty Trust?

After amassing the wealth that you want to leave to your family, the best way to secure the future of following generations is to set up a dynasty trust in California. It is a tool you can use to accomplish your estate planning goals. Currently, the state has removed the Rule Against Perpetuities. That means that you can set up your dynasty trust to last up to 90 years.

You cannot, however, add as many funds to the trust as you would like; there is a limit, which is $12.92 million, or double that for married couples, as of January 2023. You also need to take great care with the entire process. Your dynasty trust cannot be changed at all after it is created.

How a Dynasty Trust Works

First, it must be mentioned that this kind of trust is not something you can create on your own on a website. The first step is to have a consultation with an attorney. The method on how to set up a dynasty trust is both complex and unforgiving. Remember, you can never change it once it's set up, and the funds are distributed. There are federal, state, and local laws that apply. The tax implications are crucial.

To begin, come up with an end-of-life plan for your estate. It is essential to remember that you don't actually have to be close to death to start the process. As they say, "It's never too early!" And, although a dynasty trust is a good idea, it also might not be your best option. 

Each situation is different, and what is good for the person down the street may not apply to you. As an example, it's legal to set up a dynasty trust in the State of California. Your family, however, might live in another state where the law is different. There are methods for dealing with that, and an attorney knows how to handle that situation. 

You can also decide whether to be super-strict or quite lax with the rules you set up regarding the trust. Remember, a dynasty trust is a types of irrevocable trust. Choose wisely when it comes to who, what, where, why, and how. Picking trustees upon whom you can rely for both discretion and levelheadedness is important. Those folks are going to be responsible for your wealth long after you're gone. Your trustees must be familiar with all of the applicable laws, tax implications, and all other processes involved. 

Choosing beneficiaries isn't as easy as it sounds either. With a dynasty trust, you're planning for your descendants well into the next century. The further along the planning goes, the more Byzantine it gets, which is why it's necessary to have an attorney's perspective and help along the way.

After those steps are complete, it's time to pick the funds that you want to include in your trust and put them into it. Remember, all plans must be complete and finalized before you "fork it over." Funding the trust is the act that irrevocably seals the deal. That means that you have to plan for as many ramifications as possible.

Benefits of a Dynasty Trust

Although dynasty trust planning is intricate, time-consuming, and a bit imposing, it's worth it. You get to secure the future of at least three generations of your family. The short version of the benefits includes:

• You establish all the rules yourself.

• No one can ever change the trust.

• Nobody can legally waste the funds.

• You avoid multiple instances of the estate tax.

• People must meet criteria you set to be able to gain either income or a single payment from the trust.

One of the reasons you need an attorney to help you set things up is that you might need counsel about the rules you want to create. Some things might not be allowable under the law. Obviously, you'd want everything about your dynasty trust to be on the up-and-up. If they're not, then there could be problems. You wouldn't want the trust invalidated because of legal mistakes.

After taking the greatest possible care in setting things up, you've maximized your wealth for those to come. The criteria in place protect the trust from being wasted or misused by the beneficiaries. 

You won't lose large amounts of the entrusted funds to tax, which you only pay once at the beginning of the process. The disadvantages of a dynasty trust include, paradoxically enough, the fact that it cannot be changed. If you forget something or change your mind, then you're out of luck. Also, the funds are as irrevocable as the terms of the trust. Even the grantor cannot access them if an emergency arises. They are locked-in for those 90 years.

Dynasty Trusts and Income Tax

The only time income tax matters is if the beneficiaries receive income from the trust. Because the funds sit there, they aren't taxed. The grantor pays tax at the beginning when setting up the trust. And, after 90 years, so do the final beneficiaries. But, as stated, there is no tax throughout that time. And, what the beneficiaries pay at the end doesn't apply to incomes. Instead, it's called the "generation-skipping tax." Any one of the dynasty trust attorneys with whom you speak will be able to explain this concept further.

Legacy Trust vs. Dynasty Trust: What's the Difference?

Quite literally, there is no difference between the two terms. Both of them are used interchangeably to indicate a legal entity created to secure the future of generations' worth of someone's family.

How Much Does it Cost to Set Up a Dynasty Trust?

There is no set cost. It varies based upon the size of the trust, the criteria you want to set in place, and how much your attorney will charge either by the hour or as a flat fee. The applicable taxes also count. Generally, the cost could be between $3,000 and $30,000. Your attorney will have further details on the everything involved.