A dynasty trust is a

trust Trust often refers to: * Trust (social science), confidence in or dependence on a person or quality It may also refer to: Business and law * Trust law, a body of law under which one person holds property for the benefit of another * Trust (bus ...

designed to avoid or minimize

estate taxes An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died. International tax law distinguishes between an es ...

being applied to family wealth with each subsequent generation. By holding assets in trust and making well-defined (or even no) distributions to beneficiaries at each generation, the assets of the trust are not subject to estate, gift or

generation-skipping transfer tax The U.S. generation-skipping transfer tax ( "GST tax") imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one ge ...

(GST) taxes. Moreover, the wealth can be exempt from GST tax) if properly set up. By its nature, a dynasty trust can run in perpetuity. Thus, it must be created in a state that either has no

rule against perpetuities The rule against perpetuities is a legal rule in the American common law that prevents people from using legal instruments (usually a deed or a will) to exert control over the ownership of private property for a time long beyond the lives of peo ...

, such as Delaware or South Dakota, or has a very long perpetuities period, such as in Nevada (365 years) or Wyoming (1,000 years). Dynasty trusts in the United States were created as a reaction to the imposition of the

on trusts. By keeping assets inside a trust for an extended period of time, wealthy families can by-pass taxes for several generations or even forever. This effect has been compounded by other favorable state laws that favor the wealthy, such as the elimination of state income taxation and other favorable conditions for managing wealth (such as "quiet trusts") and

asset protection Asset protection (sometimes also referred to as ''debtor-creditor law'') is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of ...

. In 2018, as a result of the doubling of the GST tax exemption by the

Tax Cuts and Jobs Act of 2017 The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, , is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs A ...

, very wealthy families in the United States seeking to shelter their wealth from future transfer taxes have taken a new interest in setting up dynasty trusts. As of January 1, 2020, the GST exemption is $11.58 million per person (and twice that for a married couple). Because this exemption (which is the highest ever) is scheduled to sunset on January 1, 2026, and could be repealed sooner depending on new legislation, the interest in dynasty trusts is steadily rising in 2020 just as it did in 2011 when there was a risk that the GST exemption could be severely reduced.

References

Inheritance Personal taxes Property law Taxation in the United States Wills and trusts {{US-law-stub