How NYC Estate Planning Lawyers Could Help You Establish a Legacy to Last Generations
Dynasty trusts can be a powerful estate planning instrument for anyone hoping to pass their financial legacy to the next generation. If appropriately structured, dynasty trusts facilitate the easy transfer of assets to heirs while minimizing tax liabilities and shielding beneficiaries from a wide range of potential legal woes. The appeal of dynasty trusts lies in their longevity and flexibility, with grantors always having the final say in how their assets should be used, preserved, and distributed.
However, dynasty trusts aren’t without their downsides. Compared to revocable living trusts, they are more difficult to amend and require more time and effort to establish.
Our Brooklyn estate planning lawyers at Landskind & Ricaforte Law Group, P.C. understand that you want your wealth distributed to your heirs with as few complications as possible. Here, we discuss how a dynasty trust might fit into your estate plan.
An Overview of Dynasty Trusts
A dynasty trust is a trust established for the benefit of multiple generations. In some respects, these trusts are similar to other irrevocable trusts. However, they differ in several key respects. Dynasty trusts do not, for instance, have any set expiration date. Instead of being structured to provide an inheritance to a small and select group of beneficiaries, they typically bequeath shares in the trust or the trust’s assets. These shares can be passed down to subsequent generations, negating many liabilities and largely circumventing federal and state estate taxes.
Although many dynasty trusts are established for grandchildren, their scope can be much more expansive. So long as they have enough funding, they can last for decades, outliving their grantors and ensuring that your legacy gives your heirs an advantage for generations to come.
The Elements of a Dynasty Trust
Dynasty trusts are a legal arrangement between multiple parties. The name and nature of these parties may vary, but almost every trust contains the following elements:
- The grantor. A grantor, sometimes termed the “trustor” or “settlor,” is the person who establishes and funds a dynasty trust. During their lifetime, they may retain limited access to the trust’s assets, but the extent of such access depends on whether the trust is revocable or irrevocable.
- The beneficiary. A trust beneficiary receives income, dividends, or assets from the trust. If the trust is revocable, the grantor and the beneficiary may be the same person. If the trust is irrevocable, the beneficiary must typically be somebody else—often a child, a grandchild, or other relation. In dynasty trusts, the names of every possible beneficiary cannot always be listed.
- The fiduciary. A fiduciary is someone responsible for managing assets in the interest of another person or party. In the context of a trust, a fiduciary may be referred to as a “trustee” or a “successor trustee.” Trustees are bound by fiduciary duty, meaning they must manage the trust’s assets to benefit the trust’s mission and beneficiaries.
Every trust must have a grantor, a beneficiary, and a fiduciary. However, dynasty trusts only work when they name multiple beneficiaries and, in many cases, have provisions allowing for the transfer of assets to heirs who have yet to be born.
The Financial Backbone of a Dynasty Trust
Although trusts are a distinctive form of legal arrangement, they are not entities in the same sense as a small business or a larger corporation. Trusts can manage and control assets, but they cannot exist without assets. In other words, a trust can subsist only so long as it is funded. Once a trust exhausts its funding, it will typically expire.
Dynasty trusts can be funded in a variety of ways and with almost every type of asset imaginable. Potential sources of funding could include the following:
- A residence or secondary home
- Commercial real property
- Cash accounts
- Private investments
- Stock portfolios
- Life insurance policies
- Retirement accounts
- Shares in a corporation or family-owned business
However, if a dynasty trust is to provide multi-generational wealth transfer, it must typically contain assets of either significant or appreciating value. As such, successful dynasty trusts are often more reliant on interest-generating investments rather than smaller trusts intended only to provide an inheritance for a single set of beneficiaries.
The Benefits of a New York Dynasty Trust
Dynasty trusts are designed to guarantee an inheritance for multiple generations, but their main features relate to tax avoidance and wealth preservation. Some of the most significant advantages of dynasty trusts include the following:
Tax Avoidance
Although most New Yorkers don’t have to worry about sizeable taxes on their inheritance, more affluent families face severe risks in the form of federal and state estate taxes. Dynasty trusts can minimize these risks by including provisions that explicitly address and circumvent liabilities like the generation-skipping transfer tax.
Wealth Preservation
Dynasty trusts can help ensure that the grantor’s success and wealth advantage their children, grandchildren, and—potentially—future generations of the same family.
Asset Protection
Since most dynasty trusts are irrevocable, trust-held assets are usually shielded from the grantor’s personal liabilities. These liabilities include taxes, legal judgments, and future creditor claims against their estate. Heirs also benefit because their distributions won’t be affected by divorce or litigation.
Control and Structure
The grantor’s wealth may well last for generations, but the grantor—and the grantor alone—dictates the trust’s course. Trustors can generally dictate how, when, and to whom their assets are distributed. This can prevent mismanagement and waste by less-responsible beneficiaries, protecting the trust from uninformed and rash decisions.
The Limitations of a New York Dynasty Trust
Dynasty trusts can facilitate the transfer of complex and high-value assets across multiple generations, but they aren’t without drawbacks. Before making a decision, consider the following:
- Dynasty trusts are irrevocable. Dynasty trusts are usually irrevocable. Once a dynasty trust has been established, it cannot be easily revoked nor can its terms be easily amended. This is beneficial because it creates a firm separation between personal and trust-controlled assets. However, it means ceding a degree of control to your trustee.
- Dynasty trusts take time to establish. Establishing a dynasty trust means complying with state laws and federal rules. It can take longer and cost more money to set up a dynasty trust than a comparatively simple revocable living trust.
- Dynasty trusts can make it difficult to allocate inheritances. If a dynasty trust lasts for multiple generations, economic fluctuations—from inflation to investment performance—can dilute inheritances and potentially erode the trust’s value.
- Dynasty trusts have different rules in different states. Different states have different rules for dynasty trusts. This could cause complications if the trust’s beneficiaries live in jurisdictions that treat distributions differently.
Explore Your Options for Establishing a Long-Lasting Estate Plan
Dynasty trusts are versatile tools that can serve many purposes, from managing estate liabilities to structuring a long-lasting and multi-generational inheritance. However, dynasty trusts are complex instruments with significant drawbacks and aren’t right for everyone.
The Landskind & Ricaforte Law Group, P.C could help you meet your estate planning goals by:
- Helping you keep your estate out of probate
- Talking through the strengths and weaknesses of different kinds of trusts
- Reviewing your asset and financial solutions to identify estate planning tools that make sense for both your budget and your long-term goals
- Establishing a dynasty trust that complies with state law, federal statutes, and all other applicable rules and regulations
Don’t take chances or cut corners with your legacy. If you’re considering establishing a dynasty trust, contact a Brooklyn estate planning attorney today.