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How do dynasty trusts work?

On Behalf of | Jun 7, 2023 | Estate Planning

There are many estate planning options available. One you might not have heard of is called a dynasty trust. 

This is a way of passing your assets to future generations while shielding those assets from tax liabilities. It’s a tool that tends to be used more by wealthy families than those with average wealth  – as if you only have a reasonable amount of assets to pass down, your beneficiaries are likely to use them all in their lifetime.

How do these trusts avoid tax?

Tax laws tax people on the property they own. When you place assets into one of these trusts, they belong to the trust, rather than a person, so escape taxation.

It’s important to note, however, that your descendants will pay tax on any income that the assets within the dynasty trust generate. That is why most people using dynasty trusts fund them with the sort of assets that will not generate an income.

Can the beneficiaries just take money from the trust when they like?

No. You tie the money up within the trust and have someone manage it for you. The only time anyone will get money from it is when you decided they would. So if you decide each descendant gets $100,000 once a year, that is all they will get, even if they have an urgent need for more.

Once you make the trust you can’t change it, and neither can anyone else, so you need to think very carefully before tying up your assets in this way. 

Do these trusts have limits?

Many people see these trusts as unethical, and governments are under pressure to restrict them. If considering one, make sure you find out more about the current maximum amount of assets you can put into them and the maximum amount of time they can last.