Trust Planning: Crossing the Generational Frontier

April 30, 2024

We see “Dynasty Trusts" as a key planning tool with multiple advantages as you consider your family’s wealth and well-being over time.

The largest wealth transfer in history has already begun, with more people becoming billionaires recently because of inheritance than for any other reason, according to estimates.1 This has reinforced interest in estate planning that can transfer wealth tax-efficiently, while providing flexibility to ensure that it is a support for—and not a burden on—future generations.

In our view, a key tool in this regard is the discretionary, multi-generational trust, also known as a Dynasty Trust, which can remain in existence for centuries, supporting your family according to your wishes and beliefs. Dynasty Trusts have recently been central to many of our planning conversations, particularly in light of the scheduled post-2025 rollback of currently elevated federal exemption amounts to previous levels.

Potential Tax Savings

Why create a Dynasty Trust? The key reason is often potential wealth transfer savings.

Many affluent individuals worry about estate tax issues in relation to their immediate children, but for those with more assets, this may extend to generations down the line. Employing a Dynasty Trust in a jurisdiction like Delaware at current exemption levels, a married couple can transfer up to roughly $27 million, during life or at death, that avoids federal gift, estate and generation-skipping transfer tax.

Keep in mind that, assuming no action by Congress, that amount will be cut by more than half after 2025, when many provisions of the 2017 Tax Cuts and Jobs Act are set to expire. If placed in a Dynasty Trust this year, the entire $27 million will have the potential to last for several generations. Over that time, it can sit outside of your family’s estates, and be invested and used for various purposes without further threat from wealth transfer taxes.

The display below highlights the potential results achieved using a Dynasty Trust that is never subject to transfer tax versus an account or trust that is subject to such taxes for each generation. Assuming a 7% annual return, a hypothetical Dynasty Trust initially worth $5 million and without transfer tax would grow to $53 million over 35 years and to $570 million over 70 years, compared to $32 million and $205 million, respectively, for the regular account taxed at a 40% rate at 35 and 70 years—roughly corresponding to generational transitions.

Dynastic Advantage

Hypothetical Transfer Tax Savings: Growth of $5 Million Over 70 Years

Aspire 2Q 2024 

Source: Neuberger Berman. Assumes a 7% annualized rate of return and application of a 40% generation-skipping tax to the "no trust or non-exempt trust" scenario at the start of years 35 and 70.

State tax savings. Beyond transfer taxes, locating a trust in certain jurisdictions can offer state income tax savings as well. For example, Delaware does not tax the accumulated income of a resident non-grantor trust (including interest, dividends and capital gains) unless the trust has a Delaware beneficiary. This can allow significant income tax savings and portfolio growth when compared to subjecting the same trust to other states’ income tax regimes.

A trust creator living in New York may take advantage of Delaware law by locating a Dynasty Trust in Delaware and avoiding New York’s high income tax rates. In this case, the creator would name a Delaware trustee for the trust and ensure that it does not own property located in New York, has no New York source income and does not otherwise have a New York fiduciary. Similarly, locating a trust in Delaware may avoid California’s high income tax rates by not having a California fiduciary and drafting the trust in a manner that avoids having non-contingent California beneficiaries. It is important to note that distributions to trust beneficiaries may pass out portions of the trust’s current taxable income or even prior years’ income in certain states, including New York and California, to the trust’s beneficiaries when distributions are made to those beneficiaries who live in such states.

Access, Protection, Control and Privacy

Beyond the compelling math associated with transfer tax savings, as well as state income tax savings, we believe there are other reasons to consider a Dynasty Trust:

Prudent beneficiary access. A frequent concern for clients is the impact that money will have on their children, even as adults. You may believe it will reduce your children’s initiative or distort their values; or more basically, you may feel that your children may have difficulty or do not have the capacity to handle the assets they may receive. In traditional trusts, this may lead to the establishment of age hurdles such as 25, 30 or 35 years, when children receive their legacies based on the assumption that they are “ready.” However, with a Dynasty Trust, the assets may remain within the trust in perpetuity, used for specified purposes such as health, education, maintenance and/or support, or at the discretion of the trustee, who can consider the circumstances of the beneficiaries when making decisions—for example, purchase of a first home, money to start a business, etc.

Creditor protection. The concept of a “spendthrift” trust is well established, in which family members can only receive trust assets at the discretion of the trustee, thus protecting them from potential creditors or those who might take advantage of them. There’s a typical assumption that these trusts are for the irresponsible, unsophisticated or vulnerable. However, those parents with an array of doctors, lawyers or investment bankers as offspring may be reluctant to place guardrails around family money because they feel their children know what they are doing. In such situations, we may say, “You trust your children, but do you trust a potential creditor such as a future spouse?” That tends to change the discussion, as clients recognize potential vulnerability associated with divorce, among the other hazards that their children may face, including other potential unforeseen liabilities or creditors.

Investment control. A potential benefit of Dynasty Trusts within jurisdictions like Delaware is investment control and flexibility, whereby the creator of a trust may separate the investment function from administrative duties associated with the trustee. A separate investment advisor (often initially the grantor of the trust) would have exclusive responsibility for trust investments, and have the ability to invest more broadly, in assets such as private partnerships or concentrated positions.

Privacy. You may be concerned that heirs will be influenced by knowing that they are beneficiaries of a trust. Unfortunately, most states require the trustee to inform the beneficiaries about the trust. In certain jurisdictions, however, you can create a trust that defers the date when beneficiaries will be informed of its existence—providing peace of mind that they won’t know about it until they are mature and ready to handle the news and the potential access to wealth. Dynasty Trusts may come with other privacy advantages, such as the sealing of trust records.

Eye on the Details

For those who live outside a state that provides for Dynasty Trusts, there are, of course, technical requirements in establishing such a trust or converting an existing trust to take advantage of a particular state’s laws. Typically, the trust needs to have sufficient connections to the new state, including the use of a resident trustee, and should avoid certain ties to the individual’s home state. Working with advisors with extensive knowledge of broad estate planning issues and the intricacies of laws across jurisdictions can help facilitate the process of creating a Dynasty Trust as you seek to achieve important goals for you and your family in the coming decades and beyond.

1Source: UBS, Billionaires Ambitions Report 2023.

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Hypothetical growth examples are for informational and educational purposes only.

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