If your long-term financial goals include leaving a lasting legacy for multiple generations of family members, you may want to consider establishing a dynasty trust. Also known as a generation-skipping trust, this estate planning vehicle can help ultra-high-net-worth families create lasting generational wealth by sheltering assets from federal estate taxes and protecting future generations from creditors. This extended duration allows assets to remain in the trust and grow over time, benefiting not just children and grandchildren but potentially great-grandchildren and beyond.
One of the primary advantages of dynasty trusts is their ability to minimize or eliminate estate, gift and generation-skipping transfer (GST) taxes. By placing assets into an irrevocable trust, they’re removed from the taxable estate of the grantor and future beneficiaries. This means that as the assets appreciate in value, they do so outside the reach of these taxes, allowing wealth to accumulate more efficiently over time.
In addition to tax benefits, dynasty trusts offer strong asset protection. Because the dynasty trust is a type of irrevocable trust, the assets are generally shielded from creditors, lawsuits and divorce settlements involving beneficiaries. This feature makes them particularly attractive to high-net-worth families seeking to safeguard their legacy
How a dynasty trust works
Following is the process for establishing, funding and successfully executing a dynasty trust.
Step 1 – Establish trust rules.
A dynasty trust is a type of irrevocable trust that allows you, the “grantor,” to establish rules for how assets will be managed and distributed to beneficiaries. These rules can provide you with the flexibility to establish financial support for future generations.
You’ll establish these rules in a legal document called a trust deed. The trust deed outlines the trust’s rules, responsibilities and limitations of trustees, administrative instructions and the trust’s beneficiaries.
Step 2 – Fund the trust.
You can fund the trust with a variety of assets, such as cash, investments, real property and shares of your business. Once you fund the trust, you have no control over the assets and are unable to modify the trust’s terms, so it’s important to carefully consider the terms and funding of the trust.
Step 3 – Manage the trust.
Your designated trustee will be responsible for managing the trust. Doing so includes making investment decisions, enhancing the value of trust, interacting with beneficiaries and coordinating the eventual distribution of assets. Trustees — either family members or professionals — then manage the trust according to these guidelines, providing oversight and continuity. Control is another key feature. The original grantor can set detailed instructions on how and when assets are distributed, helping to ensure future generations use the wealth responsibly.
Step 4 – Wealth transfer.
When properly executed, assets in the trust will remain protected from beneficiaries’ creditors, including legal judgements and ex-spouses. The trust will continue to operate and be distributed to future generations of family members according to the trust’s terms.
By maintaining the family’s assets within the trust, future generations should have minimum exposure to the GST tax, which is typically assessed on assets passed to generations beyond the grantor’s grandchildren.
Important considerations
Before establishing a dynasty trust, it’s important to carefully consider the following.
Consideration #1: Which assets you will use to fund the trust
The assets you place in the trust will depend on your goals. If your main goal is to reduce your taxable estate and slow its growth, you may want to fund the dynasty trust with assets that have the potential to significantly grow over time or those that produce significant income.
On the other hand, if your goal is to reduce your heirs’ income tax liability, you could consider funding the trust with cash or cash-efficient assets. That’s because the dynasty trust will need to pay taxes on any income produced by its assets.
Assets placed in a dynasty trust are typically chosen for their long-term growth potential, tax efficiency and ability to generate income for future generations. Here are the most common types of assets used:
- Marketable securities: Stocks, bonds, mutual funds and ETFs are popular choices, because they can appreciate significantly over time and provide dividend or interest income. These assets are relatively easy to manage and diversify, making them ideal for long-term wealth preservation.
- Real estate: Income-producing properties, such as rental homes, commercial real estate buildings or farmland, are often included. Real estate can provide steady cash flow and appreciate in value while also offering tax advantages like depreciation and 1031 exchanges.
- Private business interests: Family-owned businesses or shares in private companies can be transferred into a dynasty trust. Doing so helps ensure continuity of ownership and management across generations while also protecting the business from estate taxes and potential family disputes.
- Life insurance policies: These are frequently used in dynasty trusts to provide liquidity for future estate taxes or to fund distributions. The death benefit is typically free of income tax and can be structured to avoid estate taxes if owned by the trust.
- Alternative/private investments: Assets such as private equity, private credit, collectibles or intellectual property may also be included, depending on the family’s wealth strategy and risk tolerance.
Consideration #2: Where the trust should be sited
Different states have different laws governing dynasty trusts, which is why it’s important to carefully consider the state in which you establish the trust.
Some states impose limitations on how long a dynasty trust can last. If your goal is to maintain the trust for multiple generations, you’ll want to establish it in a state that allows dynasty trusts to exist in perpetuity. These states currently include Alaska, Delaware, Illinois, Missouri, New Hampshire, Ohio, Rhode Island and South Dakota. Florida, Nevada, Tennessee and Wyoming allow dynasty trusts to exist for several hundred years.
Different states also have different income tax regulations. If you choose to establish your dynasty trust in a state with zero income tax, the trust won’t need to pay state tax on any income produced. If the trust’s beneficiaries also reside in a zero-income-tax state, they won’t need to pay state income tax on their trust distributions.
Consideration #3: The timing of funding
You have the flexibility to fund the trust in a single lump sum or spread out the funding over time. If you choose to spread out the funding, you may be able to use the annual gift exclusion to reduce the amount of your lifetime gift tax exemption used to fund the trust.
For example, in 2025, an individual can give up to $19,000 annually (per donor per recipient) without incurring gift taxes or using up their lifetime gift tax exemption. That means married couples can give up to $38,000 per year to an unlimited number of recipients. If you have time to gradually fund the trust, this can be a smart way to do so.
There are some significant changes to tax laws potentially coming in 2025 to consider, so there can be some advantages to funding a dynasty trust in the near future. Doing so could allow you to:
- Maximize your use of lifetime exemptions: As of 2025, the lifetime estate and gift tax exemption is at a historically high level — $13.99 million per individual. However, this is scheduled to revert to roughly half that amount on January 1, 2026, unless Congress acts to extend it. Funding a dynasty trust before this sunset allows you to lock in the higher exemption, shielding more wealth from future estate and GST taxes.
- Leverage compounding growth: The earlier assets are placed into a dynasty trust, the more time they have to grow tax-free. This compounding effect can significantly increase the value of the trust over generations, especially when the assets are invested in appreciating or income-generating vehicles.
- Avoid future legislative risk: Tax laws are subject to change, and future legislation could reduce exemptions or impose new restrictions on trusts. By funding a dynasty trust now, you can “grandfather in” current favorable rules, potentially avoiding less favorable conditions later.
- Gift strategically: If you anticipate a liquidity event (like the sale of a business or real estate), it may be wise to fund the trust before the event to transfer the asset at a lower valuation. This strategy can reduce the amount of your lifetime exemption used and maximize the wealth transferred to future generations.
Consideration #4: The process for distributing assets
To help extend the life of the trust, you can establish distribution rules. For example, you may decide to limit distributions to pay only for certain expenses, such as education and healthcare.
Or you may use the trust to pass along your values to future generations. For example, if you value higher education, you may want to authorize the trust to make a cash award to any heirs who receive an advanced degree. If you want to reinforce the importance of hard work, you can set rules that disallow distributions for any heirs who don’t maintain full-time employment.
Just remember, any rules you establish today are very difficult to change in the future. Be sure to carefully consider the distribution parameters before putting them in writing.
Consideration #5: Who will serve as trustee
A trustee is the individual you appoint to administer trust provisions and carry out your wishes. This can be a complex and time-consuming undertaking, so it’s important to choose wisely.
Your chosen trustee has a fiduciary duty to your beneficiaries to properly administer the trust. If he or she fails to fulfill these duties, the trustee can be held personally liable for damages. If this isn’t a burden you want your loved ones to bear, you may want to consider naming a corporate trustee.
Corporate trustees are in the business of administering trusts and estates, and they’re regulated by external agencies and internal auditors to help ensure they’re meeting the obligations of the trust. A corporate trustee serves as a neutral third party and is often in a better position than family members to administer the trust in an unbiased manner.
