Reviewing a dynasty trust

Dynasty Trust in Florida

What Is a Dynasty Trust?

A Florida dynasty trust is an estate planning trust that provides estate tax savings and asset protection throughout multiple generations. As with any Florida trust arrangement, a dynasty trust is a contract between a trustmaker, one or more trustees, and a defined group of trust beneficiaries.

Dynasty trusts are designed to continue in effect and minimize estate tax liability through multiple future family generations.

How Does a Dynasty Trust Work?

Dynasty trusts are created during a family’s estate planning process. Dynasty trust provisions are typically incorporated in a family’s revocable living trust, but a family can create a separate dynasty trust. Dynasty trusts must be irrevocable. If part of a revocable living trust, the dynasty trust provisions become irrevocable upon the trustmaker’s death.

Dynasty trusts maintain family wealth in continuing trusts and sub-trusts over multiple generations for up to 1,000 years. Practically, dynasty trusts are perpetual in Florida. To create a dynasty trust, you must define the trustees and beneficiaries, decide which assets to include in the trust, determine how trust funds will be distributed, and fund the trust after signing it.

Example Use of a Dynasty Trust

Suppose there is a married couple who are the trustmakers. They have two children, and each of their children has their own two children (grandchildren), and each grandchild has then has two children (great grandchildren), and so on for 1,000 years.

Upon the death of the married trustmakers, their dynasty trust agreement provides for their assets to be divided equally between their two children. The successor trustee does not distribute half of the family assets to each child outright. Instead, the successor trustee sets up two, equal sub-trusts, one for each child. Each child is the beneficiary of their separate sub-trust.

Typically, each child becomes the successor trustee of their own separate trust so that each child has control over their share of inherited assets. The successor trustee (child or his appointed trustee) has the discretion to distribute to themselves as beneficiaries as much income and principal from his separate trust share that they need for their health, education, maintenance, or support.

When either of these two children die, whatever assets remain in their inherited separate sub-trust remains in further trust for the benefit of their own two children (the grandchildren). The terms of these trusts do not change. For example, each grandchild can be the trustee of their own separate trust, and each child has the discretion to take income and principal for their own health, education, maintenance, and support.

When a grandchild dies, the money remaining in their separate trust is divided equally into new and separate trusts for their own children (the great-grandchildren) under the same trustee and distribution rules. This cascading trust series continues for generations up to a 1,000 years after the Trustmaker’s first dynasty trust became irrevocable.

How the Estate Tax Depletes Family Wealth

The Internal Revenue Service imposes an estate tax on high-net-worth family estates. The federal estate tax rules exempt from estate taxation approximately $13 million of estate assets. This exemption goes up with inflation year, but the exemption could be reduced (or increased) in 2025 or after that. Each person can use their own estate tax exemption so the married couple in the above hypothetical can protect up to about $26 million from estate taxation when they transfer their assets to their children at death or during their lifetime.

Wealth transfers to succeeding generations in amounts above the applicable exemption are subject to federal estate tax. The federal estate tax rate (2024) ranges from 18 percent up to 40 percent of estate value. Florida does not have its own estate tax, although many other states tax assets located in their state in addition to the federal estate tax

The estate tax is imposed at each generational transfer. This means that, in our hypothetical, the children will pay estate tax on their inheritance above $26 million, and later, the grandchildren may also pay tax if they inherit more than $26 million. The federal government taxes the same assets each time they pass to the next family generation.

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Generational Estate Tax

Dynasty trusts are used in estate planning to gain multi-generational estate tax savings. A couple with a taxable estate above $26 million today will impose an estate tax liability on their children. Assuming the value of the inherited property either stays the same or more likely significantly appreciates in value during the children’s lifetimes, the family would normally pay additional estate tax on the appreciated value of the same assets plus additionally acquired assets at the children’s death, assuming that the estate appreciation exceeds any increases in the estate tax exemption amount.

Another round of estate tax will be due upon the grandchildren’s deaths, again assuming estate appreciation exceeds increases in the tax exemption. The IRS imposes a new estate tax bill at each generation applicable to the same wealth. More and more family wealth is paid to the federal government (and to applicable state governments) time and time again.

This estate tax bill cannot be reduced by skipping a generation and bequeathing assets directly to grandchildren or great-grandchildren. Attempted transfers to remote heirs is subject to a separate tax called a generation skipping tax or GST. Transfers to a beneficiary who is two generations removed from the grantor, or 37 years younger, are subject to a separate GST tax of 40% of the amount transferred, subject to a lifetime GST exemption of about $13 million (2024).

Discussing a dynasty trust in Florida

Dynasty Trusts Avoid GST Taxation

Dynasty trust provisions avoid GST taxation and duplicative estate tax assessments through subsequent generations. Family wealth above the applicable estate tax exemption transferred within an irrevocable dynasty trust is subject to an estate tax just once, at the deaths of the initial trustmakers. No further or additional tax is imposed on these assets if they are subsequently bequeathed to successive generations within the same dynasty trust.

Future appreciation in asset value does not result in estate or GST taxation upon dynasty trust wealth. Wealthy families use dynasty trusts to achieve estate tax free growth in wealth over multiple generations up to 1,000 years in Florida.

Asset Protection Benefits of Dynasty Trust

A dynasty trust also protects family assets from judgment creditors for multiple generations. At its core, a dynasty trust is an irrevocable trust with a spendthrift clause and procedure for optional discretionary distributions of income and principal. The dynasty trust is different from other discretionary spendthrift trusts mainly because of its estate tax and GST avoidance. Money retained in a Florida discretionary spendthrift trust is protected from creditors of successor beneficiaries. Therefore, a dynasty trust protects accumulated family wealth from all civil creditors of future generations.

Which State Is the Best for a Dynasty Trust?

The home state or situs of a dynasty trust is important. Dynasty trusts are governed by the laws of the trust situs.

There are advantages to having a dynasty trust formed and administered under Florida law. For one, Florida is one of the few states that does not impose its own estate tax in addition to IRS estate taxes. Next, Florida statutes permit dynasty trust to continue for 1,000 years, whereas other states have shorter time limits. Also, Florida’s asset protection of dynasty trust assets is more favorable than many other states.

Applicable State Law

Several factors determine what state law the courts will apply to a dynasty trust. The most important factor is the trust agreement’s own provision that specifies the trust situs and applicable law.

But courts also consider other factors in determining their jurisdiction such as the residence of the trustees and the location of trust assets. For example, suppose a married couple living in Florida established a living trust with dynasty trust provisions and stated that the trust is a Florida trust. But also suppose that the trustmakers named a successor trustee who resided in a foreign state, named beneficiaries residing in the foreign state, and then funded the trust mostly with property located in the same foreign state.

In that case, courts may decide to administer the dynasty trust provisions under the laws of the foreign state because that state had a greater overall connection to trust administration.

Our dynasty trusts agreements include provisions to ensure Florida trust situs. The trust situs can be preserved by careful planning that considers the residency of successor and co-trustees and the location of most trust assets. The trust document can include the rights of an independent trustee to move trust situs to take advantage of favorable tax laws or improved asset protection.

Gideon Alper

About the Author

I’m an attorney who specializes in asset protection planning. I graduated with honors from Emory University Law School and have been practicing law for almost 15 years.

I have helped thousands of clients protect their assets from creditors. Before private practice, I represented the federal government while working for the IRS Office of Chief Counsel.