Dynasty trusts are a type of estate planning that helps people protect their assets for future use, especially for future generations.

The primary goal of a dynasty trust is to ensure the transfer of wealth and assets. It helps mitigate any financial loss you may suffer in cases of divorce or to creditors.

Furthermore, dynasty trust is durable. It can last for countless generations, dating back as far as 100 years. In fact, in countries like the U.S., dynasty trust can last forever.

Who Is Dynasty Trust For?

The first question to ponder is: Are you looking for effective ways to manage your financial assets and protect your wealth for your unborn generation? If this is a question you are asking yourself, then you fall into the category of people for whom dynasty trust is.

What Other Types of Estate Planning Are There?

Typically, estate planning avoids the need to go to a probate court to decide who will represent a person in cases where individuals are not in the capacity to make decisions or after their death. So, people may use any estate planning to secure their assets for their families and future generations.

A person may opt for different types of estate planning, including revocable trusts and powers of attorney. 

Is Dynasty Trust Different from the Types of Estate Planning Above?

Yes. While the other types of trust may apply when the creator is alive, dynasty trust only takes effect after the creator’s death. It also helps safeguard the creator’s assets for future generations.

Bearing in mind that dynasty trust is for your children and their future children, it helps secure the assets away from any circumstances that may arise and may lead to contestation of the distribution of assets.

What Are the Circumstances that Dynasty Trust Protects Against?

• Divorce: If your child gets divorced, if their inherited asset is not in a dynasty trust, their separated partner will likely get half of the asset. That is because the court will see the asset as a general asset. However, if the inherited asset is in a dynasty trust, the court may not count it as part of the assets available for sharing.
• Lawsuits: If your child gets into a nasty lawsuit and loses, the child may lose the inherited asset while paying the settlement. However, the inherited asset is in a dynasty trust. In that case, the legality attached to the trust makes losing its assets in lawsuits nearly impossible.
• Tax: When you transfer your assets to your children, you pay an estate tax. When your children want to pass the asset on to their children, they must also pay estate tax, and the cycle continues.

However, when the asset is in a dynasty trust, you do not need to pay an estate tax to transfer it to your children, and your children do not need to pay to transfer it to their children.

Are Dynasty Trust Laws Jurisdictional?

Yes. Laws that guide estate tax and dynasty trusts vary from state to state. For example, California trust laws state that a child cannot create a dynasty trust; only family members can. Further, some states allow co-trustees.

How Can You Set Up a Dynasty Trust?

A settlor is a person who creates a dynasty trust. The settlor must first sign appropriate legal documents, in sound mind, to create the dynasty trust. 

“You should know that the dynasty trust may have few assets when created. This is because you can use it as a gift-collection platform. The parents or any member of the family who wishes to give an asset to a child may pass the asset to the trust instead of gifting it directly,” says estate planning attorney Sasha Begum of Begum Pelaez-Prada, PLLC.

Also, instead of transferring the family assets directly to the child, you may pass them into the dynasty trust as a gift. It ensures that you avoid heavy estate taxes.

What Drawback Should You Know About?

The most important thing is that you need to educate your child on dynasty trusts and how they work. Although a dynasty trust has a strong barrier that protects the child from lawsuits or estate taxes in case of transfer, the child’s actions may cause the loss of assets in the trust.

To prevent this, the trust may hire lawyers who advise the child on matters concerning the trust. You may also have a co-trustee who is a professional in estate trusts. 

In some cases, depending on your child’s behaviour, you may also opt for third-party permission to withdraw assets. For example, if your child has a gambling problem or battles drug addiction, they should not be a direct receiver of assets. Instead, you may have a co-trustee or even an independent trustee be in charge on behalf of the child.

The co-trustee may sell assets on behalf of the beneficiary and handle any financial transactions regarding trust assets.

Are there Drawbacks to Hiring a Professional Trustee?

If you do not have anyone close to you as your trustee, you may consider hiring a professional trustee to manage the dynasty trust.

However, unlike familial trustees, professional trustees are thorough, which may appear too slow for the beneficiary. Thus, they may be impatient with lengthy procedures that involve tedious paperwork.

Further, professional trustees take heavy charges, and this may already take a chunk of the asset.