You may have heard of dynasty trusts, which are sometimes called bloodline trusts. The purpose of these is to help ensure that family wealth is kept within the “bloodline” as it’s passed from one generation to the next while minimizing estate, transfer and gift taxes that eat away at family wealth if it’s not properly handled in estate planning.
States have different laws that affect dynasty trusts. Many allow them to continue in perpetuity – essentially forever. Others, including Minnesota, still recognize something called a “rule against perpetuities.” This limits how long a dynasty trust can continue.
Under Minnesota law, it can last until 21 years after the death of the last person who was alive when the trust was created. Even with this limitation, you may still find it advantageous to create one. It’s crucial to understand that these are irrevocable trusts. That means no changes can be made to a dynasty trust once it’s established.
How dynasty trust assets are shielded from taxes
These trusts are exempt from federal estate tax as long as the amount is under the estate tax exemption amount (currently just over $12 million). Further anything placed in the trust is exempt from taxes on the grantor’s or any beneficiaries’ estates. It’s also protected from creditor claims.
It’s important to remember that if the assets in the trust earn income or dividends, the beneficiaries of that income may have to pay income tax on it. However, by selecting tax-free or non-dividend-paying assets, you can protect your heirs from having to pay income tax on the money earned.
Corporate trustees are the norm for dynasty trusts
If you’re considering establishing a dynasty trust, you’ll probably want to choose a corporate trustee to manage it rather than have successor trustees. Even if you name successor trustees, the trust will outlast everyone currently in your family. Corporate trustees are usually special companies or financial institutions that will handle those responsibilities.
This is merely a broad outline of dynasty trusts. It’s always best to have experienced legal guidance in developing your estate plan so that you can determine what estate planning tools best meet your goals and the needs of your family.