How Does a Dynasty Trust Work?

A dynasty trust is financial legacy account with allows a person, normally one with at least several million dollars in assets, to leave an enduring trust account to their progeny. The main purpose to set up a dynasty trust is to protect one's assets from the estate tax, as well as creditors and relations outside the bloodline of the family. When setting up a dynasty trust, the benefactor commits all the assets to the trust and is able to specify in fairly intricate terms how the money is meant to be used, but after that time the assets leave their control to be distributed to their offspring. A true dynasty trust is meant to last indefinitely.

The estate tax is a levy on assets that a person bestows upon another in the event of their death. While the estate tax does not affect the average person greatly, those with extreme wealth can have their assets taxed in excess of 40%. As such, wealthy people often attempt to find other ways to avoid the estate tax in order to leave a greater amount of wealth to their offspring. A dynasty trust creates an account which pays out money to the benefit of the offspring, but the assets do not technically become their assets. Since the offspring are not gaining an actual direct inheritance from the dynasty trust, but rather periodic payments from interest earned on the trust assets, an estate tax is not charged.

Another important aspect of a dynasty trust, is that unlike a direct estate transfer, its aim is to create an endurance source of wealth for creator's offspring. Beneficiaries of a dynasty are limited in their access to the trust's funds, as prescribed by the creator; a dynasty trust is meant to act as a sort of endowment for a family: income interest earned can be used by the family, but the overall amount of real wealth in the trust is never meant to shrink. By only using wealth created by the assets of the trust, the dynasty trust can supposedly endure for forever. This avoids allows the assets to avoid being squandered by a spendthrift heir, and whittled down by repeated estate taxes over generations.