Part III · Structures · No. 10

Dynasty trusts

A long-duration trust funded with GST exemption that compounds wealth across generations free of estate and GST tax. The choice of state situs — South Dakota, Delaware, Nevada — determines the trust's economic lifespan and its administrative environment.

What the structure is

A dynasty trust is an irrevocable trust drafted to last as long as state law allows — perpetually in states that have abolished the rule against perpetuities for trust property (such as South Dakota and Alaska), or for a long statutory maximum in others (for example 365 years in Nevada and 1,000 years in Wyoming). The trust is funded with all or part of the settlor's GST exemption, producing an inclusion ratio of zero. Distributions to beneficiaries — including beneficiaries two or more generations removed — proceed without GST tax, and trust property is drafted to stay outside each beneficiary's estate.

The tax problem it addresses

Without a dynasty trust, wealth passing through three or four generations of a family is exposed to the 40% estate or gift tax at each generation, and transfers that skip a generation also bear the 40% GST tax (§2641). With a properly structured and exempt dynasty trust, wealth grows in the trust without further transfer-tax cost — potentially for centuries. For 2026 the GST exemption equals the $15,000,000 basic exclusion amount per individual (indexed for inflation after 2026), as set permanently by the One Big Beautiful Bill Act.

Mechanics

• Settlor funds the trust with cash, marketable securities, or other property — up to available basic exclusion amount and GST exemption ($15,000,000 each for 2026; GST exemption is not portable to a surviving spouse).
• Settlor allocates GST exemption on a timely filed Form 709 (or relies on the automatic-allocation rules of §2632(c)) to produce a zero inclusion ratio.
• Trust is sited in a no-rule-against-perpetuities state. Trustee is a state resident (institutional or individual) connecting the trust to that state's jurisdiction.
• Trust is drafted as a grantor trust for income-tax purposes (IDGT — intentionally defective grantor trust), so the settlor pays the income tax during life, further depleting the gross estate without using additional exemption.
• Distributions are made at trustee discretion or under defined ascertainable standards.
• The trust holds whatever assets are appropriate — investments, family LLCs, real estate, family-business interests.

The applicable statutes and authorities

• 26 U.S.C. §§2601-2664 (GST tax).
• 26 U.S.C. §2010 (basic exclusion); §2631 (GST exemption).
• 26 U.S.C. §§671-679 (grantor trust rules).
• State trust statutes — South Dakota Codified Laws ch. 55; Delaware Code title 12; Nevada Revised Statutes ch. 166; Alaska Stat. ch. 13.
• State perpetuities statutes — South Dakota abolished the rule in 1983 (SDCL §43-5-8); Delaware in 1995 for personal property held in trust (real property is limited to 110 years); Alaska abolished it in 1997; Nevada (365 years) and Wyoming (1,000 years) adopted long fixed periods instead.

Substance and audit risk

• Estate inclusion. The trust must avoid §2036, 2038, 2041 inclusion in the settlor's estate. Retained powers, retained beneficial interests, and incidents of ownership are the danger zones.
• State income tax. A non-grantor trust sited in South Dakota with a South Dakota trustee may avoid state income tax on undistributed income, but states use differing nexus tests — grantor residence (e.g., New York, subject to its resident-trust exemption), trustee or administration location, or beneficiary residence (California taxes accumulated income in proportion to resident beneficiaries with non-contingent interests). North Carolina Department of Revenue v. Kaestner, 588 U.S. 262 (2019), held only that a state cannot tax trust income based solely on the residence of an in-state beneficiary who received no distributions, had no right to demand them, and could not count on receiving them.
• Decanting and modifications. States vary in their permission to decant a trust (transfer assets to a new trust with modified terms) — South Dakota and Delaware permit aggressive decanting; some states do not.
• Trust-protector roles. Many dynasty trusts include trust protectors with limited powers to direct trustee actions; protector powers must avoid creating §2041 general powers that pull assets into the protector's estate.

Cost and complexity

Setup: experienced trust-and-estates counsel; institutional or individual trustee in situs state; potentially trust-protector designation. Annual: trustee fees (institutional trustees typically charge an asset-based fee, often lower for directed trusts where an outside adviser manages investments); annual income-tax compliance; potentially a state-level annual report. The administrative cost is meaningful but bounded.

Common combinations

• Dynasty trust funded with family LLC interests. Trust receives LLC interests at valuation discounts; LLC holds the operating assets.
• Sale to dynasty trust for installment note. Settlor sells appreciated assets to the IDGT for a promissory note bearing AFR. Gain not recognized (grantor trust); appreciation moves to trust.
• Dynasty trust as charter-yacht owner. Long-term family vessel ownership through the trust, with operating subsidiary.
• Dynasty trust as art holding. Multi-generational family art collection held in trust, with use rights to beneficiaries.
• Spousal lifetime access trusts (SLATs). Each spouse may establish a trust for the other, preserving indirect access while using each spouse's exemption; trusts that are too similar risk being "uncrossed" under the reciprocal-trust doctrine of United States v. Estate of Grace, 395 U.S. 316 (1969).

Recent developments

The scheduled end-2025 sunset of the doubled exclusion did not occur: the One Big Beautiful Bill Act (Pub. L. 119-21, signed 4 July 2025) set the basic exclusion — and therefore the GST exemption — at $15,000,000 per person for 2026, indexed for inflation thereafter, with no sunset date. Pre-2026 gifts were in any event protected by the anti-clawback regulation, Treas. Reg. §20.2010-1(c). The rush to fund trusts before 2026 has given way to planning for the higher permanent exemption, though future legislation can still change it.

Kaestner (2019) limited the reach of state income tax on trusts based purely on the residence of beneficiaries without a present right to income; state responses have been mixed, and several states continue to assert tax based on grantor residence or other connections.

Competitive dynamics among trust-situs states have produced ongoing statutory innovations — directed trusts, silent trusts, asset-protection refinements, and trustee-licensing regimes.

Reviewed October 2026