Earlier this year, NBA team owner Gail Miller made headlines when she announced that she was effectively no longer the owner of the Utah Jazz or the Vivint Smart Home Arena. These assets, she said, were being placed into a family trust, therefore raising interest in an estate planning tool previously known only to the very wealthy—the dynasty trust.
Dynasty Trusts Explained:
A dynasty trust (also called a “legacy trust”) is a special irrevocable trust that is intended to survive for many generations. The beneficiaries may receive limited payments from the trust, but asset ownership remains with the trust for the period that state law allows it to remain in effect. In some states, a legal rule known as the Rule Against Perpetuities forces the trust to end 21 years after the death of the last known beneficiary. However, some states have revoked this limitation so, in theory, a dynasty trust can last forever.
Advantages and Disadvantages:
Wealthy families often use dynasty trusts as a way of keeping the money “in the family” for many generations. Rather than distribute assets over the life of a beneficiary, dynasty trusts consolidate the ownership and management of family wealth. The design of these trusts makes them exempt from estate taxes and the generation-skipping transfer tax, at least under current laws, so that wealth has a better ability to grow over time, rather than having as much as a 40-50% haircut at the death of each generation.
However, these benefits also come at the expense of other advantages. For example, since dynasty trusts are irrevocable and rely on a complex interplay of tax rules and state law; changes to them are much more difficult, or even potentially impossible as a practical matter, compared to non-dynasty trusts. Because change is very difficult or even impossible as a practical matter, the design of the dynasty trust needs to anticipate all changes in family structure (e.g. a divorce, a child's adoption) and assets (e.g. stock valuation, land appraisals), even decades before any such changes occur.
Is a Dynasty Trust Right for Your Family?
This trust usually makes the most sense for very wealthy families whose fortunes would be subject to large estate taxes. For multiple generations, it can defend estates from taxes, divorces, creditors or ill-advised spending habits. That said, if you desire to give your descendants more flexibility with their inheritance, a dynasty trust may not be right for you. To learn more about the pros and cons of this and other estate planning strategies, contact our office today.
If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.