A dynasty trust is a kind of irrevocable trust irrevocable trust while being irreversible which permits riches to be preserved inside a single family for numerous generations without paying taxes. The tenure of a dynasty trust and the tax advantages are the two main advantages that come with dynasty trusts.
Dynasty Trusts Last Almost Forever
A dynasty trust is able to exist for up to 21 years after the death of the last beneficiary who was alive when the trust was founded (this is the rule against perpetuities). For example, if a grantor named one of his or her grandchildren as a beneficiary, and that grandchild is a baby who lives to be 100, the dynasty trust will span 121 years. Normally, the grantor makes his or her children the beneficiaries and when the last child dies, the generations below become the beneficiaries (grandchildren, great-grandchildren, etc.)
However, several states are changing, or even repealing, this rule. A dynasty trust can continue up to 365 years in Nevada, according to a 1987 statute (NRS 111.1031(1)(b)) and a 2015 Nevada Supreme Court ruling, Bullion Monarch Mining, Inc. v. Barrick Goldstrike Mines, Inc. They can last up to 90 years in California.
Tax Benefits of Dynasty Trusts
The tax advantages may be the most appealing element of a dynasty trust. Your beneficiaries could be subject to estate taxes if you never set up a trust. A non-dynasty trust allows one generation of beneficiaries to benefit from tax savings, but whatever is left over after that generation is liable to estate taxes. However, if you set up a dynasty trust, the assets you place in it are only liable to the federal gift/estate tax one time which is when you fund it. Though the money remains and expands over multiple generations, it is never taxed again.
What to Beware Of
Despite its many benefits, any increase on the assets inside the dynasty trust will still be subject to capital gains tax, thus most people who create them prefer to invest them with non-income producing assets (cash, growth stocks without dividends, life insurance profits, tax-free municipal bonds, etc.).