Dynasty Trusts

This type of irrevocable trust lets people keep wealth in the family for multiple generations while minimizing the transfer tax burden and vulnerability to creditors. They are allowed in states that have abolished or weakened the “Rule Against Perpetuities,” which prohibited unlimited-duration trusts.

Assets placed in a dynasty trust are subject to initial transfer taxes but are carefully chosen to keep their value under the estate, gift and generation-skipping tax exemption maximums allowed. Beneficiaries generally have access to trust assets but don’t receive them outright.

Benefits

By holding assets in the trust for long periods, families can reduce the tax burden on successive generations of beneficiaries while still giving them the use of the assets during their lifetime. The trust usually includes a spendthrift provision to prevent future creditors (including former spouses) from directly accessing trust assets.

Advantages of South Dakota-based dynasty trusts

• Dynasty trusts can be created in South Dakota for families who do not live in the state.
• South Dakota allows trusts to continue in perpetuity, avoiding federal transfer taxes for generations.
• The state does not impose any form of taxation (income, dividend interest, capital gains) on these trust assets.

Cautionary notes

Because this type of trust has a heavy income tax burden, it may be desirable to fund the trust with assets that don’t produce income (e.g., real estate, tax-exempt bonds, growth stocks).

Descriptions of trusts are intended to be informational and are not specific recommendations. Contact a trust officer at Sterling Trustees for more detailed information on what would be best suited to your circumstances.