Real Estate & Dynasty Trusts

The ‘dynasty trust’ allows those with substantial assets to control their use in perpituity, shielding future descendants from creditors or ex-spouses and partners, and reducing or eliminating their burden for estate taxes, gift taxes and generation skipping transfer (GST) taxes.

Are Investment Properties Well-Suited To ‘dynasty trusts’?

Because income-producing trust assets generate income taxes, income-producing real estate is not the best asset to include in a dynasty trust. This type of trust is best for family estates and other property that will be passed on to heirs, but not leased, flipped or sold to turn a profit. Non-income-producing assets are best suited to dynasty trusts.

What Assets Can ‘dynasty trusts’ Hold?

A Dynasty Trust can hold stocks and tax free municipal bonds, funds and other tangible assets such as precious metals, valuable artworks, and rare collectibles (whiich can include items such as antiques, fine rugs,  jewelry and gems, stamps and coins), as well as insurance policies, and other long-term investments. The Dynasty Trust is irrevocable, so it can’t be changed or ended before it’s stated termination date.  The person establishing the trust has the absolute authority to set regulations of almost any type, as long as they’re legal. 

Typically, dynasty trusts create distributions or the health, education and maintenance of beneficiaries. Rather than inheriting a lump sum or property, beneficiaries receive distributions in specified amounts for particular purposes.

Is a dynasty trust really ‘forever’?

The answer to that question depends on where your trust is established. Prior laws prohibited  trust protections in perpituity, requiring that a trust have a 21 years limit following the death of a potential beneficiary alive when the trust was established. Many states modified the rule and permitted trusts lasting approximately 90 years in a law named ‘Uniform Statutory Rule Against Perpetuities.’

Moreover, half of U.S. states and the District of Columbia simply struck the  limit on perpetuities altogether, paving the way for dynasty trusts. These include Virginia and Maryland. A few state like Florida and Delaware, went further–offering tax breaks and increased flexibility, including strong protection if beneficiaries divorce or get into debt.

This benefits the states’ financial institutions, which charge substantial fees to manage dynasty trust assets, as well the trust holder and its beneficiarues.

More details on protections afforded by ‘dynasty trusts’

Because the assets of a dynasty trust are owned by the trust, not beneficiaries, assets aren’t included in beneficiaries’ taxable estates. As a result, creditors and divorce courts can’t touch the assets held by the trust.

The primary benefit of a dynasty trust, however, is its tax advantages. The 2017 Tax Cuts and Jobs Act (scheduled to sunset at the end of 2025) was a boon for dynasty trusts. The lifetime exemption for the estate tax basically doubled– currently (2023) $12.92 million for individuals and $25.84 million for married couples filing jointly. These sums can be transferred to heirs during life or at death without tfederal estate taxes. The annual limit on tax-free gifts also rose in 2023, to $17,000., $34,000 for married couples filing jointly. These gifts can be made to as many individuals as desired.

The individual tax and estate tax provisions expire after 2025, except:

• Reduction of ACA penalty tax
• Change in inflation indexing
• Several changes in the tax base for business income.
• Some provisions have already expired, such as  the increased deductibility of medical expenses (2017 and 2018).

Many of the business tax provisions don’t sunset at all. Congress made the individual provisions temporary to reduce the revenue cost of the TCJA to a level consistent with the overall constraint on the 10-year revenue loss in the Congressional Budget Resolution and  comply with Senate budget rules under the process used to pass the tax act that require no increase in the federal budget deficit after the tenth year.