BY: JON DAUBERT, JD, LL.M.
Senior Vice President & Trust Officer – Argent Trust Company | (210) 581-0436
With federal estate tax exemptions at historic highs, individuals and married couples seeking to support their family and heirs should consider creating a dynasty trust to maximize the wealth they pass down to future generations.
Dynasty trusts have been a powerful tool to preserve and transfer wealth for many years and became even more appealing with the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). Provisions in the TCJA raised the lifetime estate tax exclusion from $5.5 million in 2017 to $11.58 million (double that amount for husband and wife) in 2020.
That’s the good news. The bad news is that in 2026 the exclusion amount will be rolled back to pre-TCJA levels. Given the uncertain political climate, there’s no guarantee the current exemption will stay in place. Here are four key reasons why you should form a dynasty trust now to capitalize on the generous tax benefits currently in place:
1. Grantors can support their family for generations
One of the primary advantages of a dynasty trust – aside from the estate tax exemption amounts – is that it allows grantors to distribute funds to multiple generations. It’s an ideal wealth management tool that allows grantors to cement their legacy and support their children, grandchildren, great grandchildren, and great, great grandchildren (as well as charitable organizations).
While several states have rules against perpetuities that limit how long a trust can be in place, other states are much more progressive. Tennessee, for example, permits dynasty trusts to last up to 360 years. Fortunately, individuals can create a dynasty trust with a longer duration – even if the trust was created in another state. To ensure another state has jurisdiction over a trust, substantial trust administration must be performed in that state and usually include one of the following:
• The trustee’s principal place of business must be located in that state
• Some trust records must be held in the state
• Income tax returns must be prepared or arranged in the state; and
• Some trust assets must be held in an account in the state
2. Dynasty trusts allow grantors to determine how wealth is managed
Another appealing factor of a dynasty trust is that grantors can dictate how their wealth will be invested, managed and distributed to beneficiaries. The grantor’s wish for control and governance can be as broad or as strict as desired. Provisions can be included that require beneficiaries to meet certain conditions to receive distributions (to prevent heirs from squandering funds). Clauses also can be added to ensure charitable organizations, for instance, meet certain financial criteria or performance metrics to ensure they are being good stewards of the trust’s money.
3. Family assets are protected with a dynasty trust
A properly written dynasty trust will include provisions that protect trust assets from creditors (commonly referred to as a spendthrift provision). Ownership of the assets is transferred to the trustee, effectively preventing creditors from going after those assets to repay debts or other claims. It also protects family assets if a family member is sued or divorces.
4. Future tax savings could be significant
There are no tax savings (aside from the estate tax exemption) when a dynasty trust is created. The assets funded into a dynasty trust and any appreciation of those assets, however, no longer are included in the grantor’s gross estate for federal estate tax purposes. The future tax savings could be considerable if the trust is governed by the laws of taxpayer friendly states like Tennessee, which has no income tax. Additionally, several states do not have capital gains taxes, so proceeds from the sale of assets are taxed only at the federal level.
To maximize the financial benefits of a dynasty trust, individuals should always consider working with a trust company that operates in a state with low taxes and strong asset protection laws. Our company has offices in Tennessee – which is consistently ranked as one of the most trust-friendly states in the country – for those very reasons.
One final observation: consider enlisting the services of an independent, corporate trustee to administer your dynasty trust. An experienced corporate trustee with a licensed firm can provide proven, professional management skills and will be knowledgeable of applicable trust laws – unlike a family member or friend of the family who is not experienced in the complicated and changing nature of trust regulations.
A dynasty trust can be an ideal strategy to take care of your loved ones and their loved ones for generations to come. When evaluating options, consult with an attorney, CPA or trust professional to make sure a dynasty trust is right for you and your family.
To learn more about the benefits of a Tennessee-chartered dynasty trust, please contact me via email or phone (210-581-0436) or anyone else on our Argent Trust Company team.
###
