How Do Dynasty Trusts Work?

Tax Professionals' Resource
June 13, 2012 — 1,304 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Dynasty trusts allow individuals to preserve their family assets. These can be valuable instruments, allowing families to pass down estates and other assets from generation to generation.

Significant long-term financial support is provided by dynasty trusts, so understanding how they work is essential for accountants, attorneys and estate planning professionals.

What's included in a dynasty trust?

Essentially, a dynasty trust gives families the opportunity to pass wealth to their descendants. When this happens, the trust is controlled by the terms initially created by its grantor. Once funded, the grantor loses control of the assets, and cannot regain them or make changes to the trust's terms.

This arrangement is designed to last in perpetuity - as long as a grantor has descendants, he or she could continue the trust. However, some state laws limit these trusts' terms. Be sure to review the laws of your clients' states that relate to this type of trust, as you might need to consider the length for which a client could truly be beneficial.

A trustee typically handles a dynasty trust's day-to-day operations, which may include its assets and administrative issues. This person is often put in charge of evaluating needs and making the necessary distributions, and is responsible for investment decisions relating to assets.

Other parties are also involved in this kind of trust. The grantor might offer guidance on how to manage it. Meanwhile, beneficiaries - the grantor's descendants, including existing children and grandchildren, may also want a say in the trust's management.

The benefits of dynasty trusts

Families can reap the benefits of dynasty trusts. Clients capable of transferring significant funds and other assets to their trust, whether currently or upon their death, might consider this option, as it could help their families over extended periods of time.

Dynasty trusts are categorized as domestic asset protection trusts (DAPTs) and are viewed by some legal professionals as a safe option. While other investments might involve offshore structures, DAPTs are based entirely in the United States.

"For those who are not ready to make the cognitive leap offshore, then a DAPT is absolutely better than nothing," Chicago attorney Jim Duggan told AdvisorOne.

Clients might consider alternatives such as a beneficiary defective inheritor's trust, in which a third party sets up the trust and names the client as the beneficiary. While this may help maximize the assets your client will receive in the future, it might not be the best fit for your specific situation.

Review all options when discussing trusts with your clients, as this will allow you to determine which type will deliver the maximum value. 

Tax Professionals' Resource