If you want to pass money to future generations without having it subject to gift and estate taxes, then a dynasty trust may be right for you. A dynasty trust allows trust assets to be used for the benefit of multiple generations while keeping the assets out of the grantor’s and the beneficiaries’ taxable estates.
The main benefit of a dynasty trust is the avoidance of estate and gift taxes over many generations. In 2022, the federal estate tax exemption is $12.06 million ($24.12 million for couples). Estates valued at more than the exemption amount will pay federal estate taxes on the excess at a rate of 40 percent. Add to that the 3.8% Medicare tax applicable to larger estates and Pennsylvania’s Inheritance Tax, in some cases as high as 15%, and the result is confiscation of half or more of the excess The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.06 million in 2022. Note that you can give any number of people up to $16,000 each per year (in 2022) without the gifts counting against the lifetime limit. In addition, the generation skipping transfer (GST) tax affects assets passed to grandchildren. The tax is imposed even when property is left in trust for a grandchild. The GST exemption is the same as the estate and gift tax exemptions. If you transfer more than the GST exemption, the tax rate is 40 percent.
Assets transferred to a dynasty trust are subject to estate, gift and GST taxes only when initially transferred and only if they exceed federal exemption thresholds. While estate and gift tax exemptions are currently very high, in 2026 the exemption is set to drop to the previous exemption amount of $5.49 million (adjusted for inflation).
Another benefit of a dynasty trust is that the assets in the trust are protected from the beneficiaries’ creditors or in the event a beneficiary divorces. If the trust is properly structured, creditors cannot go after trust assets to pay the beneficiaries’ debts.
How a dynasty trust works
A dynasty trust is an irrevocable trust, which means once it is created it cannot be changed. Funds transferred into the trust will be taxed if they exceed the lifetime gift tax exclusion. However, once funds are transferred to the trust, beneficiaries of the trust can pass assets to the next generation without those assets being subject to estate, GST, or gift taxes. In addition, the assets placed in the trust are removed from your estate and provide tax-free growth.
The trustee of the trust can be a beneficiary, but because the trust is designed to last for generations, it makes sense to have a professional fiduciary, such as a bank trust department or other corporate entity serve as trustee. The trustee manages and distributes the assets in the way you set forth in the trust agreement. Usually, the trust provides for the beneficiaries’ support during their lifetimes. For example, it could direct the trustee to pay out income regularly, make periodic principal distributions, or make distributions contingent on the beneficiary’s need.
The length of time the dynasty trust can continue to exist depends on state law. In Pennsylvania, a newly created dynasty trust can run indefinitely. Traditionally, the rule against perpetuities states that a trust can’t last longer than 21 years past the death of the last beneficiary. However, many states, such as Pennsylvania, have opted out of the rule, allowing trusts to continue for many generations.
The downside of dynasty trusts is that they are inflexible. Once the trust is created, you lose access to the assets. Because dynasty trusts last for generations, they require guesswork about what will be best for your descendants.
Dynasty trusts are complicated instruments that must be designed correctly in order to provide benefits. Contact the lawyers at Vasiliadis Pappas to determine if a dynasty trust is right for you.