A comprehensive estate plan generally requires the use of various estate planning strategies and tools that go above and beyond what a simple Last Will and Testament can accomplish. One of the most commonly used tools is a trust agreement. In fact, many people incorporate several trusts into their estate plan because of the numerous and varied goals a trust can help you reach. If you have a moderate to large estate that you wish to keep in the family and protect from any potential threats, you may wish to consider establishing a dynasty trust as part of your overall estate plan. As with all important estate planning decisions, the decision to incorporate a dynasty trust into your estate plan should only be made after consulting with your estate planning attorney. If you are unfamiliar with specialized trusts, however, it may be beneficial to learn more about how dynasty trusts work.
Before exploring how a specialized dynasty trust works, it may help to review some trust basics. A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. A trust beneficiary can be an individual, an organization, a charity, or even your family pet. Beneficiaries can also be current or future.
Trusts are first broadly categorized as either a testamentary trust or a living trust. A testamentary trust is one that only becomes active after the death of the Settlor and is typically activated by a provision in the Settlor’s Last Will and Testament. A living trust, on the other hand, activates as soon as all the formalities of creation are in place. Living trusts can be further sub-divided into revocable and irrevocable living trusts. As the names imply, a revocable living trust is one that can be modified, terminated or revoked by the Settlor at any time and without the need for a reason. An irrevocable living trust, conversely, cannot be modified, terminated or revoked by the Settlor once the trust is active.
Although trusts were once used almost exclusively by wealthy families as a method of protecting and passing down the family wealth, they have since evolved to the point where there is a specialized trust for almost any estate planning purpose and are found in even the most basic estate plan.
What Is a Dynasty Trust?
Although trusts are now used for other purposes as well, they continue to be used as an excellent tool for protecting the family wealth. In fact, that is the primary purpose of a dynasty trust. When a parent creates a trust for children, the goal is often to create a staggered distribution of the assets held by the trust. The incentive is often to avoid a lump sum distribution to a young adult child who may not be prepared to handle such a large amount of money all at once. With a dynasty trust though, the goal is to hold onto the family wealth for as long as possible, shielding that wealth from creditors, divorces, bankruptcy, and other potential threats to the family wealth. Beneficiaries of the trust may be entitled to interest earned on the Principal, or even access to the Principal itself for emergencies or small distributions; however, the majority of the family wealth remains in the trust for as long as possible in a dynasty trust.
The Rule Against Perpetuities
While the goal of a dynasty trust is to hold onto family assets for as long as possible, it is important to know exactly how long that is. That, in turn, depends on the state in which the trust is created and how the state interprets the “Rule Against Perpetuities.” The Rule Against Perpetuities is a fairly complex legal concept, the basic idea of which is that a trust must end 21 years after the death of the youngest beneficiary alive at the time the trust was created. To illustrate, imagine that you create a dynasty trust today and name your children and grandchildren as beneficiaries. Right now, the youngest beneficiary alive is your granddaughter Sophia who is five years old. Sophia eventually lives to be 95 years old, meaning she dies in the year 2112. If the state in which you created the trust uses the Rule Against Perpetuities, the trust would be forced to terminate in the year 2133, exactly 21 years after Sophia’s death. If the trust was created in a state that has done away with the Rule Against Perpetuities, the trust would be able to continue to exist indefinitely.
If you have additional questions or concerns related to dynasty trust, contact the experienced Massachusetts estate planning attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.