Dynasty Trusts

A dynasty trust is an irrevocable trust designed to hold and grow wealth across multiple generations in perpetuity, completely bypassing federal estate, gift, and GST taxes. The defining feature of a dynasty trust is its duration: it is established in a state that has abolished or extended the historical Rule Against Perpetuities (RAP).

Under the traditional common law RAP, a trust must terminate within 21 years after the death of a “life in being” at the trust’s creation. California, for example, follows the Uniform Statutory Rule Against Perpetuities, capping trust duration at 90 years or a 90-year “wait-and-see” period (Cal. Prob. Code §21205). To circumvent these time limits, you must establish the trust under the laws of a favorable jurisdiction—such as South Dakota (perpetual), Delaware (1,000-year limit), Alaska (perpetual), or Nevada (365 years)—and appoint a corporate trustee in that state to establish local nexus.

To maximize the benefits of a dynasty trust:

• GST Exemption Funding: You must fund the trust using your lifetime GST exemption ($15 million in 2026). Once allocated, all future growth in the trust remains permanently tax-exempt, allowing the capital to compound across centuries without depletion from estate taxes.
• HEMS Distributions: Distributions are typically made to descendants for health, education, maintenance, and support (HEMS), ensuring the trust assets remain protected from creditors, divorcing spouses, and bankruptcy.
• Crummey and the 5-and-5 Power Trap: If you use Crummey withdrawal rights to qualify annual contributions for the gift tax exclusion, the lapse of those rights is considered a taxable release of a general power of appointment under IRC §2514(e) to the extent it exceeds the greater of $5,000 or 5% of the trust assets (the “5-and-5” limit). To prevent the beneficiary from making a taxable gift to the trust, limit their Crummey withdrawal right to this 5-and-5 cap, or employ a “hanging” power of appointment that lapses slowly over time.

Pairing a dynasty trust with a Grantor Retained Annuity Trust (GRAT) or a Charitable Lead Trust (CLT) allows you to funnel tax-free appreciation or remainder interests directly into a perpetual vehicle, permanently removing those assets from your taxable estate.

A Worked Example: Compounding Across Generations Allocate $15 million of GST exemption to a dynasty trust and the inclusion ratio is zero forever: no estate or GST tax at any descendant’s death, no matter how large the trust grows. Compare that to holding the same wealth outright, where roughly every 30 years a generation dies and the federal estate tax takes 40%. Assume both pots earn the same 6% net return (Table 23.6).

Same capital, same returns—the only variable is the GST exemption. By the fourth generation the dynasty trust holds roughly $2.8 billion against $0.6 billion in the taxable line, because dodging the 40% haircut three times ($0.6^3\approx 0.22$) compounds on the capital the tax would otherwise have stripped out at each death. A single $15 million allocation, made once and never touched again, is the most powerful move in the wealthy family’s playbook—and the reason perpetual-trust jurisdictions exist.