Dynasty trust FAQs for high-net-worth individuals

Dynasty trust FAQs for high-net-worth individuals

Written by: Chelsea Hussey

What legacies do you hope to leave your children and grandchildren? They could include values such as honesty, activities such as philanthropy or even a family home passed down for generations. Many people, however, associate the word legacy with a financial inheritance.

For example, legacy trusts are structured to help wealthy individuals leave assets to loved ones while minimizing potential tax liability, depending on applicable federal and state tax laws and individual circumstances. What differentiates them from other types of trusts is that they’re designed to limit estate and gift taxes that might otherwise deplete bequests made over multiple generations. Here are some common FAQs about dynasty trusts.

Why would you need one?

Here’s what may happen in certain circumstances without a dynasty trust: If a parent leaves assets to children, the bequest may be subject to federal estate tax at the time of the initial transfer to the second generation. It may then be taxed again when the assets pass from the children to the grandchildren. This can continue for generations. Although the federal gift and estate tax exemption continues to grow and can shield most assets from tax, as of 2026, the top federal income tax rate is 37%, and certain high-income taxpayers may also be subject to a 3.8% net investment income tax. Furthermore, as of 2026, the generation-skipping transfer (GST) tax is 40% and may apply to certain transfers made to grandchildren, depending on applicable law and individual circumstances.

By contrast, with an irrevocable dynasty trust, assets are typically taxed only once — when they’re initially transferred to the trust. No estate or GST tax is due on subsequent appreciation in value, assuming the trust is properly structured and maintained. As a result, in certain high-net-worth scenarios, dynasty trusts may offer significant estate tax efficiencies over time. When the assets are subsequently sold, any gain will be taxable. Note that the basis of the assets will be determined at the time of the initial transfer, though depending on the circumstances, the “step-up in basis” rules may help to reduce the taxable amount.

What role does your state of residence play?

Many states originally adopted a “rule against perpetuities,” which prohibited trusts from lasting more than a certain number of years. But in recent years, most have reversed these rules or extended the time period.

For instance, California now limits a trust’s duration to a generous 90 years. And a handful of states — including Delaware, Alaska and Florida — have not only abolished perpetuity limitations but encourage nonresidents to set up dynasty trusts in their jurisdiction. As you can guess, it’s important to work with a professional estate planner knowledgeable about your state’s rules.

How do you set one up?

A legacy trust can be established during your lifetime, as an inter vivos trust, or as part of your will as a testamentary trust. With an inter vivos transfer of assets, you may, in certain circumstances, reduce or avoid estate tax on future appreciation. The outcome depends on the size of your estate and applicable law. Generally, assets transferred during your lifetime may not be eligible for a step-up in tax basis at your death under current law.

Because the emphasis is on protecting appreciated property, consider funding your trust with securities, real estate, life insurance policies and business interests. Naturally, it’s important to retain sufficient assets in your personal accounts to maintain your lifestyle.

Given the complexity involved, dynasty trusts are typically used alongside other estate planning tools to accomplish multiple goals. Consider consulting with a qualified estate planning advisor for more information.

Important Disclosures

Investment advisory services offered through Planned Financial Services, LLC, dba Return on Life Wealth Partners, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

The views expressed are current as of the date of publication and are subject to change without notice. The strategies and concepts discussed are provided for informational purposes only and may not be suitable for all individuals. This material is not intended as specific investment, tax, or legal advice. Individuals should consult their tax and legal professionals regarding their specific circumstances.

Federal and state tax laws are subject to change and may affect the applicability or impact of the strategies discussed.

For more information about our services and regulatory disclosures, please see our Form ADV at https://www.returnonlifewealth.com/additional-disclosures.