A dynasty trust is a form of irrevocable trust that allows wealth to be kept in a single family over several generations without having to pay taxes that would otherwise be levied.

The two major benefits of a dynasty trust are the length of its term and the tax benefits.

Dynasty Trusts Last Almost Forever

Historically, a dynasty trust could survive until 21 years after the death of the last beneficiary who was alive when the trust was established (called the rule against perpetuities). So if the grantor named one of her grandchildren a beneficiary, that grandchild is a newborn, and lives until he is 100 years old, then the dynasty trust will last 121 years.

But many states are modifying, or even doing away with this rule. In Nevada, for example, between a 1987 statute (NRS 111.1031(1)(b)) and a 2015 Nevada Supreme Court decision, Bullion Monarch Mining, Inc. v. Barrick Goldstrike Mines, Inc., it is clear that a dynasty trust can last as long as 365 years. In California, they can last 90 years.

Typically, though, the grantor names her children as the beneficiaries. When the last child dies, the next generations (grandchildren and great-grandchildren) become the beneficiaries.

Dynasty Trusts Provide Tax Benefits

The most advantageous feature of a dynasty trust is the tax benefits. Without a trust, your beneficiaries may be subject to estate taxes. With a non-dynasty trust, one generation of beneficiaries will enjoy tax savings, but then anything remaining beyond that generation will be subject to estate taxes. With a dynasty trust, the assets you put in the trust are subject to the federal gift/estate tax just once (when you fund the trust). They are never taxed again, though the money survives and grows over several generations.

What to Watch out for

Despite its many advantages, any growth on the assets within the dynasty trust are still subject to capital gains tax, so most who establish dynasty trusts prefer to fund it with non-income producing assets, like cash, growth stocks without dividends, life insurance proceeds, or tax-free municipal bonds.