What is a dynasty trust?
A dynasty trust is special type of multi-generational trust designed to allow generation after generation to enjoy the benefits of the assets placed in the trust without incurring transfer taxes, such as gift and estate taxes. For U.S. based clients, it even avoids generation-skipping transfer taxes.
And, if properly designed, a dynasty trust can last forever.
Here’s the quick version of how it works.
A typical situation looks something like this. Someone dies and leaves their estate to their children. Depending on where the decedent and the beneficiaries live, estate and inheritance taxes could be 50% or more. That means in 2 generations, the wealth is basically gone.
Now assume that prior to death, the decedent transferred their assets to a dynasty trust, naming all their bloodline family decedents as beneficiaries. The dynasty trust would hold the assets and receive the income generated by the assets. The idea is that the assets stay in the trust and so much of the income as the trustee deems appropriate is distributed to the beneficiaries.
Since the beneficiaries include all the decedent’s bloodline family decedents, anytime someone gets added to the bloodline, they automatically become a beneficiary.
Because the assets remain in the dynasty trust, they never get transferred from generation to generation, rather generation after generation is added as a beneficiary of the dynasty trust. This allows the wealth to avoid transfer taxes generally associated with generational wealth transfers.
Beneficiaries will generally be required to pay tax on distributions of income, but this is minor in comparison to the overall tax savings.
In my experience, most people have heard of trusts, but don’t fully understand what they are or how they work. This is why the first thing I do with any new client is educate them about trusts (and foundations). This allows them to effectively participate in planning their trust so we can deliver exactly what they want.
Download our “Trusts and Foundations Guide” to learn more about trusts and foundations. We developed this guide to help educate our clients. In fact, we send this to every new trust client.
You can download the guide here.
As if the above weren’t enough, dynasty trusts offer several other benefits.
Here are my top 7 reasons you should setup a dynasty trust:
1. Estate Planning
Owning assets in your personal name can cause significant estate planning problems.
Suppose, for example, you live in Country X and own assets in Countries Y and Z.
How will your assets pass to your heirs?
In this example, multiple governments could claim the authority to dictate how assets are transferred simply because of their location. Each country has their own laws. Countries X, Y, and Z will may have conflicting laws governing your estate.
Even without conflicting laws, settling an estate can be a lengthy process. It could take years for your heirs to go through the lengthy and costly probate process and actually receive the wealth you left for them.
Placing assets in a dynasty trust will ensure that they avoid the complex, lengthy, and costly probate process. Assets will be managed and distributed according to the trust’s governing documents.
Additionally, your trust will contain specific instructions and rules governing the management of your wealth. Your trust will describe “who gets what” under a variety of circumstances and events. You get to decide if there are any strings attached… such as academic achievements, performance in the family business, getting married, or reaching a certain age, etc. It’s even possible to disinherit someone for challenging the trust.
2. Succession Planning
Succession planning is closely related to estate planning, and there is some overlap, but there is an important distinction. Estate planning deals with who gets your wealth. Succession planning deals with who controls your wealth.
One of the biggest risks to wealth is how it will be managed after your death. A trust’s governing documents will ensure continuity of management by clearly defining who and how assets will be managed, both during and after your lifetime.
The goal of succession planning is to ensure that succession of control is automatic and, if desired, outside the control of heirs.
You can, for example, dictate that the outgoing trustee is to name their successor, or that a third-party, such as trust protector, has the power to replace the trustee, or that a majority of the trust’s beneficiaries elect the trustee.
It is also possible to have multiple trustees so no one person or entity has control over your assets.
Some people opt for a professional trust company to manage their trust, while others want to keep management in-house, and opt for a private trust company. For more info on professional vs. private trust companies, check this video.
The possibilities are endless.
3. Asset Management
Having assets held in a trust allows them to be centrally managed. Rather than assets being divided up between many heirs, which risks infighting and mismanagement, they will continue to be centrally owned and managed within the trust. This will help protect your heirs from making bad decisions and possibly squandering your wealth.
Your trust’s governing documents will dictate how your assets should be managed, both during your lifetime and after your death. And, with proper succession planning, you even control who will manage them.
4. Asset Protection
Asset protection is key to growing and preserving wealth. Lawsuits, spouses, and governments all pose risks. A properly structured trust offers strong asset protection because wealth is no longer owned by you, it is owned by your trust. The beneficiaries of your trust also benefit from this asset protection since they don’t own the assets either.
Additionally, many trust planning jurisdictions do not recognize foreign law or judgements. This means that anyone trying to access trust assets would need to sue in the jurisdiction of the trust. Typically, jurisdictions with such laws make accessing a trust’s assets to satisfy a judgment nearly impossible.
5. Privacy
Wealth is under attack, and one of the best pays to protect it, it to keep it private. A growing number of people despise the people of means. Many judges, lawmakers, regulators, and bureaucrats desperately crave the opportunity to redistribute wealth according to their view of “justice”.
To that end, many jurisdictions require you to provide sensitive information about directors, owners, and beneficiaries when creating an entity. Beneficial ownership registers are used to track the people associated with many types of entities, including LLCs and corporations.
Some of these registries are public, while others are private and known only to the government.
- Public beneficial ownership registers are extremely dangerous. Anyone can look up your assets, which can make you and your family a target of frivolous lawsuits, fraud, extortion, or something more dangerous, like kidnapping (this is a real issue in some parts of the world).
- Private beneficial ownership registers still have the risk of hackers, data breaches, and corrupt government bureaucrats. Additionally, governments could use this information to target you with audits and the like. There’s also always the possibility of the government formally deciding to change its private beneficial ownership to a public one.
Over 99% of the people and institutions named in “offshore leaks” did nothing wrong. But many got caught up in the leak because of beneficial owner registers and corporate registries. Many now struggle with banking, financial institutions, and insurance companies—guilty by association.
Even lawsuits will be likely be less likely to ever occur because people will think you don’t have assets to collect against because they are privately held in your trust. Why sue if there is nothing to collect?
This is why privacy is so paramount to protecting your wealth and security. I personally believe that everyone has the right to privacy. And, that privacy is a key component of freedom, something that is fast disappearing.
Trusts structured in certain jurisdictions can provide tremendous privacy benefits.
In some jurisdictions trusts are completely private documents that aren’t registered or recorded anywhere. Additionally, the trustee will hold legal title to the assets providing an additional layer of protection and anonymity to you and trust’s beneficiaries.
6. Tax Efficiency
I learned a long time ago that it is often more difficult to keep wealth than to generate it. This is largely due to taxes. In addition to tax rates going up everywhere, new taxes seem to be popping up daily. And it’s no surprise, governments can’t get their spending under control and, in order to get elected, politicians keep promising voters more and more benefits at the expense of corporation and the HNWIs.
A properly structured trust can offer you and your family tremendous tax benefits.
First, many trust planning jurisdictions offer low or no tax. It is much easier to grow wealth when it is not constantly diluted by taxes.
Second, in many cases the settlor (trust creator) and beneficiaries will have the freedom to live where they want without having the trust’s income or assets attributed to them for tax purposes. While beneficiaries may need to pay tax on distributions received, they will generally not pay tax on income generated within the trust.
Finally, since assets held in the trust will continue to be held by the trust generation after generation, no transfer or estate taxes will be levied on generational transfers of wealth.
7. Preservation of Lifestyle
Understandably, one of the things people who are contemplating transferring their assets to a trust worry most, is maintaining their lifestyle and control over their assets once they have put them in trust.
Good news!
You can be a beneficiary of your trust and receive distributions from it, allowing you to maintain your desired lifestyle.
Also, if you choose to have your trust privately managed by a private trust company, you can retain control over your wealth. That said, maintaining too much control can cause adverse tax and asset protection consequences in some jurisdictions. Often influence is preferable to control.
Conclusion
We’ve been helping our clients setup trusts and foundations globally for two decades. We have the experience and knowledge to advise you on the best type of trust to setup, where to set it up, and how to build in flexibility in the event you want to amend, move, or terminate your trust.
Here are two articles on trusts and foundations you may find of interest:
- The UAE—A Trust and Foundation Planning Powerhouse;
- Why America Is the Leading Jurisdiction For Trusts.
Although the above two articles focus on U.S. and UAE trusts and foundations, those are not the only jurisdictions where we set them up. When we setup a trust or foundation for client, we look at their unique situation and then recommend the jurisdiction we believe fits them best. We have a truly global overview of relevant trust and foundation jurisdictions and their respective advantages and disadvantages. We will help you find the right jurisdiction for your trust or foundation.
If you have questions about structuring or restructuring a trust, please don’t hesitate to contact us here.