A dynasty is a sequence of rulers considered members of the same family, as for example, in China, the Persian Empire, and Egypt. In estate planning, "dynasty trust" means a trust that continues for generations.
When the federal estate tax was enacted, it was apparent that those of great wealth could avoid transfer taxes in future generations by leaving their assets in trust. Father could leave his estate of $10,000,000 in trust to pay income to Son for life, with the trust assets to be distributed to Grandson on Son's death. Since Son's income interest died when he did, there was no tax when Son died.
Congress recognized this inequity, and enacted the generation-skipping transfer tax, which provided that if a trust skipped generations, a tax, at the highest then estate tax, would be imposed when the trust assets were distributed to Grandson or some other "skip person." There was an initial exemption of $1,000,000, since raised to $5,000,000.
Thus, Father could allocate $5,000,000 of his estate to a generation-skipping trust for the benefit of Son, Grandson, and future descendants. The GSTT exemption could be elected, and the trust could cascade down the generations, growing in value over time, and eventually be distributed to a beneficiary, with no federal estate tax ever applying. Of course, income taxes would be paid on the trust earnings.
The duration of trusts was limited by a common-law rule against perpetuities, which required that a trust terminate not later than 21 years after the death of a person who was alive when the trust was created. This rule has been modified or abolished in many states, so that it is possible to create a trust that will last indefinitely.
The Treasury has proposed that the GSTT exemption extend only 90 years after the creation of the trust, so as to reduce the estate tax revenue lost from exempt trusts. This proposal will probably eventually be adopted.
Dynasty trusts are marvelous tools to preserve family wealth. We will be glad to help you establish a dynasty trust, but you must appreciate that there is a risk that the dynasty trust may not remain exempt from transfer taxes for as long as would have been the case in the past.
