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—South Dakota and Alaska (perpetual), Delaware (perpetual for personal property, with directly held real estate distributed out at 110 years under 25 Del. C. §503), Wyoming (1,000 years), 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, cap each right at the IRC §2514(e) 5-and-5 limit or use a hanging power, so beneficiaries do not make taxable gifts to their own trust when the rights lapse — the mechanics are at section “Irrevocable Life Insurance Trusts (ILITs)”, and the separate GST-exclusion trap at section “Generation-Skipping Trusts (GSTs)”.

You can feed a dynasty trust from other structures, but not all of them, and the exception catches people. A GRAT is a poor dynasty feeder: under the estate tax inclusion period (ETIP) rule of IRC §2642(f), you cannot allocate GST exemption to property while it remains includible in your estate, which it is for the entire retained annuity term. By the time the term ends and you can finally allocate, the property has appreciated—so you must spend exemption on the grown value, or none at all. That is precisely backwards from what a dynasty trust wants. The structure that does work is a sale to an IDGT (section “Intentionally Defective Grantor Trusts (IDGTs)”): allocate GST exemption to the modest seed gift up front, and every dollar of appreciation above the note rate lands inside an inclusion-ratio-zero trust for free. A Charitable Lead Trust (CLT) can also pour its remainder into a dynasty trust, though a charitable lead annuity trust carries its own GST wrinkle—the inclusion ratio is not fixed until the charitable term ends—so the unitrust version is the cleaner feeder.

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 23.12).

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.

The Cost Nobody Puts in the Brochure That table is real but it is not free, and the price is basis. Assets inside a dynasty trust are outside everyone’s estate forever, which is the entire point—and it means they never receive a step-up under IRC §1014. Not at your death, not at your child’s, not at your great-grandchild’s. Every dollar of gain accumulated over ninety years remains latent, and whenever the trust sells, it pays capital gains tax on appreciation measured from a cost basis set three generations earlier, at trust rates (section “Trust Accounting and Fiduciary Taxation”). The dynasty structure wins anyway when the estate is comfortably over the exemption, because a 40% transfer tax levied three times dwarfs a one-time capital gains bill. It loses when you are under the exemption and would have owed no estate tax at all—there you have traded a tax you never owed for one your heirs certainly will (section “Optimizing for Basis in the High-Exemption Era”). Two mitigations are worth drafting in from the start: keep the trust a grantor trust so you retain the substitution power and can swap high-basis assets in later, and give a trusted beneficiary in each generation a limited power of appointment broad enough that exercising it could trigger inclusion in their estate if a future step-up turns out to be worth more than the exemption it consumes. Flexibility across ninety years is worth more than any single projection.