Passing down wealth is a major concern for high-value individuals and families. There are two main options when planning to leave assets to your beneficiaries:
Probate: This is the default process where your assets are distributed according to your will (if you have one) or state law (if you don’t). Probate can be time-consuming and expensive due to court fees and potential taxes.
Trust: A trust allows you to designate who receives your assets and when. Trusts generally avoid probate, saving your beneficiaries time and money. If you want the wealth to stay in the family for generations, you might find a dynasty trust, an option you may want to explore. This article delves into dynasty trust from definition and effective strategies for preserving generational wealth.
What is a Dynasty Trust?
A dynasty is a type of irrevocable trust used by high-worth individuals to have assets that remain in the family for generations. Traditional irrevocable trusts terminate after a set period, for example, when the beneficiary reaches a certain age.
On the other hand, Dynasty trusts can stay in place for decades and, in some states, in perpetuity. Nevada, for example, has some of the most lenient limitations on trust durations, allowing trusts to exist for up to 365 years.
While not forever, 365 years is pretty long, and surpasses the limitations in most states. Like traditional trusts, dynasty trusts are established by a grantor and managed by a trustee.
Ways Dynasty Trusts Help Preserve Generational Wealth
Asset Protection
Anyone can face a lawsuit at any time, especially high-value individuals. Some people will want to get a piece of the wealth, even when it means filing frivolous claims. Losing a lawsuit means compensating the victim with out-of-pocket cash or having your property seized and sold.
By passing your wealth to your children directly, you expose them to asset seizure in such situations. Having assets in a dynasty trust is different because the victim must file a separate court action against the trust’s distributor besides filing a lawsuit, which can be so much work and a barrier against frivolous lawsuits. The same goes for creditors.
Estate Tax Protection
Changing asset ownership involves paying huge estate taxes. If you consider passing wealth down through generations, the taxes paid out to the government will be enormous.
For example, if you pass down $3 million to a child and grow it to $15 million by the time they die, a large chunk of that money will go to the government in estate tax as it changes ownership to your children.
If the same was in a dynasty trust, almost all of it would trickle down to their children.
Supporting Family Values
The role of dynasty trusts extends beyond wealth preservation to become a tool for instilling family values for generations. Decedents born into families whose wealth is in trust feel under a moral obligation to follow in the footsteps of their predecessors and carry forth the tradition of wealth-building and saving.
Also, if you had distribution orders involving giving to charity, you can be sure that you will keep giving to the charities you love even when you are not around.
You Need Expert Help to Create a Dynasty Trust
“Dynasty trusts are sophisticated legal vehicles for estate planning. You need to have a clear understanding of not only its benefits but also possible pitfalls. As such, you should consider hiring legal assistance to walk the journey with you,” says Reno trusts lawyer Tyson Cross of Cross Law Group.
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