Professional Perspectives: Dynasty Trust 101

By:  Scott Sewell, attorney and shareholder McAfee & Taft in Oklahoma City

This article was originally posted in Spring of  2010


Scott Sewell

Since joining McAfee & Taft A Professional Corporation in 1982, I have been assisting individuals and families with careful planning for the management and disposition of their assets. One of the most powerful tools available to these individuals and families is the dynasty trust. Properly structured, a dynasty trust can keep an individual’s assets from being included in his or her estate, so the assets can pass estate tax-free from one generation to another.

A dynasty trust is designed to hold assets in trust without direct ownership being transferred to any beneficiary (i.e., your children, grandchildren, great-grandchildren, etc.). The value of the dynasty trust is that the trust’s assets are available to provide for the health, education, maintenance and support of each and every one of your descendants. Then, for example, when a child dies, the remaining trust assets will pass to individual trusts for each of that child’s children. This pattern can go on repeatedly through the generations as allowed by state law. As long as the dynasty trust does not allow too much access by the beneficiaries, the trust’s assets are not regarded by the IRS as being “owned” by the beneficiaries and are therefore not subject to estate tax in their estates when they die. This presents a marvelous opportunity for the trust’s assets to grow for future generations because any appreciation in those assets is also exempt from estate taxes. An additional benefit to the dynasty trust is that, because the trust’s assets do not belong to any of the beneficiaries, the assets are generally protected from creditors of the beneficiaries in the event of lawsuits and divorce.

One particularly important aspect in the creation of a dynasty trust is the selection of a trustee. A corporate trustee is often the best choice because an individual will not live long enough to carry out the trust’s provisions. In addition to longevity, a corporate trustee offers the following advantages:

  • It is a specialist in handling trusts and has investment and tax expertise.
  • It is impartial — free of emotional bias and conflicts of interest with the beneficiaries.

When considering the implementation of a dynasty trust into an estate plan, the key questions to ask are (1) Do you want your assets to be protected from future divorces and lawsuits your children may face and (2) Do you want your assets to be able to grow and pass federal estate tax free from your children to grandchildren? If the answer to either question is “yes,” then you should consider a dynasty trust as a part of your estate plan. Transferring wealth to future generations without the assets becoming subject to the claims of ex-spouses, creditors or the IRS is the way that dynasties have been created in the past and the way in which dynasties can be created in the future.

Scott Sewell’s practice is principally focused on the representation of individuals, families and business owners in the areas of strategic estate planning involving wealth preservation and transfer, estate and trust administration, and business succession.