Dynasty Trust

The Dynasty Trust is a popular strategy used to avoid or minimize estate taxes.   Many states have recently adopted legislation (abolishing the Rule against Perpetuities) to encourage Dynasty Trusts, which effectively eliminate legal restrictions on the period of years that a trust may last. Now, in these twenty-three states, a trust is permitted to exist for whatever term is chosen—even if it reaches far off generations many years in the future. In Nevada, a Dynasty Trust is permitted to last for up to 365 years. Who might want a trust lasting generations into the future?

Estate plans are typically designed to include some type of trust to take care of the needs of minor children upon the death of the parents—usually lasting until the ages of twenty-one or twenty-five or so. It makes sense to limit the term to this relatively short period of time when the trust fund contains an amount that the child might exhaust for basic living needs or for the expenses of college and higher education. If there is not going to be anything left over after covering the child’s basic needs, an extended term trust would not make sense.

It is a different matter when family wealth consists of substantial accumulated savings, a valuable business, or a large insurance policy. In these cases, the issue of how long a trust should last assumes much greater significance and specific questions must be addressed. At what age do we want a child to receive a full distribution of substantial trust funds? Should we make large sums of money available to the child when he is young or do we want to control and limit the distributions based on whatever standards we can define for need, responsibility, and maturity? These are not easy questions to answer, especially for children who are young when the trust is formed.

The answer to the question of how long the trust should last is often based on two key considerations—the estate tax consequences of the plan and the possible need for asset protection.


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