For families focused on long-term wealth preservation, dynasty trusts can be a powerful planning tool. When properly structured, these trusts can protect wealth and help reduce exposure to federal gift, estate and generationskipping transfer (GST) taxes across multiple generations. They can be especially powerful with today’s historically high exemption levels.
Locking in high exemptions
The Tax Cuts and Jobs Act (TCJA) doubled the exemption amount for gift, estate and GST taxes from $5 million to $10 million (annually adjusted for inflation) for tax years 2018 to 2025. At the end of 2025, it was scheduled to revert to the $5 million amount (plus inflation adjustments). However, that changed when the One Big Beautiful Bill Act (OBBBA) was signed into law. It established a higher baseline exemption of $15 million (which also will be indexed for inflation) beginning in 2026. Transfers that exceed the exemption amount are subject to the 40% federal transfer tax rate.
The new exemption doesn’t have an expiration date. But lawmakers could make tax law changes in the future, reducing the implementing strategies now to “lock in” higher exemptions while they’re available can be beneficial for families with large estates. Setting up a dynasty trust is one such strategy.
Minimizing multigenerational tax exposure
Without careful planning, family wealth can be exposed to transfer taxes at multiple points. Assets passed from one generation to the next may be subject to federal estate tax each time they move down the family line if included in a beneficiary’s taxable estate. While today’s higher exemption levels may shield many estates from federal estate tax, amounts above the exemption are still taxed at the top federal rate of 40%. And, as mentioned, it’s possible the exemption could be reduced in the future.
Additionally, transfers that skip a generation — such as gifts or bequests to grandchildren — can trigger GST tax. This tax is applied at the same 40% rate, in addition to any gift or estate tax, making it an important factor in multigenerational planning.
A dynasty trust is designed to prevent repeated estate and GST taxation over multiple generations. When a dynasty trust is properly structured and funded, assets are generally subject to transfer tax only once, at the initial contribution to the trust. By allocating your GST tax exemption to the trust, you can generally protect future distributions to younger generations from additional GST tax, even as the trust’s assets appreciate over time.
Be aware that if trust assets are later sold, any gains are taxable for income tax purposes. Your original cost basis generally carries over from the time you transfer assets to the trust, potentially resulting in built-in capital gains. A step-up in basis typically applies only to assets included in a taxable estate at death, though certain planning strategies may be used in limited situations to address basis concerns.
Control and protection beyond tax savings
Beyond tax benefits, dynasty trusts offer significant control over how wealth is used and protected. You can define how and when beneficiaries receive distributions, helping guide financial decision-making across generations. For example, distributions can be tied to education, age milestones or other criteria that reflect your intentions.
Additionally, assets held in a properly structured trust can be protected from a beneficiary’s creditors. This helps preserve family wealth in cases of lawsuits, divorce or financial setbacks.
What else to consider
Setting up a dynasty trust involves several important considerations. For instance, you’ll need to decide whether to create the trust during your lifetime or as part of your estate plan, determine which assets to fund the trust and select a trustee.
State law is also a factor. While it’s becoming more common for states to allow these trusts to last for hundreds of years or even in perpetuity, the rules vary by state.
Finally, dynasty trusts are generally irrevocable, meaning they can’t be changed once they’re set up. This makes careful planning critical. For additional details on using a dynasty trust, contact your estate planning advisor. exemption. So
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