A dynasty trust is a long-term irrevocable trust designed to last multiple generations, often hundreds of years, depending on state law. Unlike traditional trusts that eventually terminate and distribute assets outright to beneficiaries, a dynasty trust allows wealth to be passed down without incurring estate taxes at each generational transfer.
Assets placed in the trust can grow outside the taxable estate of both the grantor and future beneficiaries. As long as they remain in the trust, this shields the assets from estate, gift, and generation-skipping transfer (GST) taxes.
Many states have modified or abolished their rules against perpetuities to allow trusts to last indefinitely. Popular jurisdictions for dynasty trusts include South Dakota, Nevada, and Delaware.
Why dynasty trusts matter more now
The One Big Beautiful Bill Act (OBBBA) was passed on July 4, 2025, to revise provisions related to various federal tax policies, including those governing estate and generation-skipping transfer (GST) tax exemptions. By altering previously scheduled reductions in these exemptions, the OBBBA aimed to provide more stability and predictability for high-net-worth families in their estate planning.
Before the Act, the exemptions were set to drop significantly at the end of 2025, leading to a rush among affluent families to take advantage of the higher limits before they disappeared. The OBBBA helped to mitigate this urgency by extending the exemptions, thus affecting how these families strategize for wealth transfer and estate management.
The new law increased the base exemption amount to $15 million per individual starting in 2026, indexed for inflation. For 2025, however, the exemption remains at $13.99 million per person, or $27.98 million for a married couple, due to the prior inflation indexing under earlier law. With careful planning, a family can fund a dynasty trust with nearly $28 million and permanently remove those assets from the taxable estate.
The OBBBA also clarified GST tax provisions by aligning the generation-skipping transfer tax exemption with the increased estate and gift tax exemption. This removed ambiguity in how GST allocations apply to trusts extending beyond the typical generation, providing additional confidence for long-term trust strategies.
Asset protection across generations
Dynasty trusts serve a purpose beyond tax savings. They offer strong protection against creditors, divorce settlements, and potential mismanagement. Since beneficiaries don’t legally own the trust assets outright, these assets are typically protected from lawsuits and claims from ex-spouses.
The terms of the trust can be designed to allow distributions based on specific needs, like education expenses or healthcare costs, while still giving the trustee discretion in decision-making. This structure helps ensure that the grantor’s original intentions about how the wealth should be used for future generations are honored.
Income tax treatment
When considering dynasty trusts, it’s essential to understand their income tax treatment. A dynasty trust is a particular type of irrevocable non-grantor trust meant to preserve wealth across multiple generations. Once established, the creator, or grantor, relinquishes control over the assets, meaning they cannot change the trust’s terms, revoke it, or reclaim ownership of the assets.
In an irrevocable non-grantor trust like a dynasty trust, any income generated by the trust is taxed at the trust’s tax rates, which tend to be higher than individual tax rates at lower income levels. If the trust generates substantial income, this can lead to significant tax obligations.
The primary goal of a dynasty trust is to maintain wealth for the benefit of future descendants while allowing them to avoid estate taxes on transfers from one generation to the next. This unique structure enables families to pass on wealth while minimizing tax implications.
Although all dynasty trusts are classified as irrevocable non-grantor trusts, their purposes and benefits vary. Financial advisors often recommend strategies to enhance tax efficiency. For example, they might suggest distributing income to beneficiaries in lower tax brackets or funding the trust with tax-efficient assets like municipal bonds or growth-oriented equities. These strategies help reduce the trust’s annual income tax burden.
Understanding the complexities of dynasty trusts, including their operation, tax implications, and potential risks, can create a more informed approach to multi-generational wealth planning.
Dynasty trusts and grantor trust strategies
Some dynasty trusts are designed as grantor trusts during the grantor’s lifetime, meaning that the income taxes on the trust’s earnings are paid by the grantor rather than the trust itself. This status typically ends at the grantor’s death, at which point the trust becomes a non-grantor trust and begins paying income tax on its earnings.
This arrangement allows the trust assets to grow without being diminished by immediate tax liabilities, thereby enhancing the compounding effect of the investments.
Grantor trust rules can be quite complex and are subject to change.
Consult with qualified legal counsel to explore the potential benefits and ensure this structure aligns with your financial goals.
State income tax advantages
Choosing the right state for your dynasty trust can result in additional savings. Several states allow for the creation of perpetual trusts and do not impose state-level income taxes on trust assets.
States like South Dakota, Alaska, and Nevada offer powerful trust-friendly statutes, including directed trust structures and privacy protections. Even if you reside elsewhere, establishing your dynasty trust in one of these jurisdictions may provide tax and administrative benefits.
Making use of valuation discounts
Dynasty trusts become even more powerful when used with valuation discounting strategies. For example, contributing closely held business interests or real estate in fractional shares can reduce the value for gift tax purposes.
Techniques like family limited partnerships or LLCs allow donors to transfer larger economic value to a trust while using less of their lifetime exemption. These strategies are subject to IRS scrutiny, so they should be implemented with careful legal and tax advice.
Incorporate life insurance
Some families use dynasty trusts to hold life insurance policies. This allows the death benefit to pass to future generations free of estate tax, while also providing liquidity to pay taxes, fund buy-sell agreements, or equalize inheritances.
When a trust owns the policy and pays the premiums, the death benefit can remain outside the estate of the insured and any beneficiaries. Irrevocable life insurance trusts (ILITs) are often used for this purpose and can be integrated into a dynasty trust structure.
Working with professionals
Establishing and maintaining a dynasty trust is not a do-it-yourself endeavor. The tax code is intricate, and the trust terms must anticipate changes in family circumstances and legal environments.
Work with a qualified estate planning attorney, CPA, and financial advisor who understand multigenerational planning. Regular reviews are essential to confirm that the trust aligns with your family’s goals, tax law changes, and evolving fiduciary obligations.
Looking forward
With the passage of OBBBA, the estate planning landscape has shifted in favor of long-term solutions. Dynasty trusts offer even more predictability and utility for families seeking to shield wealth from taxation, protect it from external threats, and guide its use across generations.
They are not for everyone. Their complexity, cost, and permanence require careful thought. However, for families with substantial wealth and a desire to leave a lasting legacy, the dynasty trust may be one of the most powerful tools available.
