Is It Possible to Preserve Generational Wealth in Trusts Forever?

In most cases, trusts must have some sort of expiration date. Only a few states allow trusts to go on in perpetuity, and in most cases, that only works in very specific cases even in those jurisdictions. However, you can still use dynasty trusts for benefits such as avoiding estate taxes and protecting wealth across multiple generations.

What Is a Dynasty Trust?

A dynasty trust is a trust designed to hold assets across multiple generations. Because the assets remain the property of the trust—and are not transferred into the ownership of heirs and beneficiaries—they remain protected against estate tax burdens, creditors, divorces and financial mismanagement by certain heirs

For example, imagine a situation where the grandfather in a family has plenty of wealth to pass on. However, he is concerned that future events might impact the wealth he will leave his adult child – events like a divorce, lawsuits resulting from accidents, etc. His worry is that there may be nothing left to pass on to grandchildren or great-grandchildren if he leaves assets directly to his child. That causes him to create a dynasty trust.

Historically, a Dynasty Trust is set up where there is a professional trustee, like a bank or a trust company. The trustee manages the assets in the dynasty trust according to the trust’s provisions. The Trustee will decide how much income and/or principal will be disbursed to the adult child and, later, the grandchildren and great-grandchildren. However, none of those people own the assets (because the trust owns the assets). They also do not have access to the trust assets outside of allowed distributions, so the adult child who may not be good with money cannot put all the assets at risk in the future.

Today, however, Dynasty Trusts are far more flexible. They can be set up in ways that offer the children, grandchildren and great-grandchildren far more control over the inheritance, without the requirement of a professional trustee. The Personal Asset TrustTM and the IRA Inheritance TrustTM are both a type of Dynasty Trust.

How Long Can a Trust Last in Massachusetts

Massachusetts has a common law and a statutory rule against perpetuities – both rules follow centuries old law that requires a trust to have an ending date. Consequently, trusts in most states cannot protect assets forever. Otherwise, individuals could use these trusts to protect wealth from certain taxes forever.

The rule in Massachusetts is that the trust must end 21 years after the death of the last beneficiary who was alive at the time the trust was created. Consider a hypothetical example to understand how long a dynasty trust might protect generational wealth for an affluent family:

  • Edward wants to set up a dynasty trust to protect wealth for his children and other descendants.
  • Edward is 67 years old and has two adult children: Robert is 42, and Tracy is 35.
  • Robert has three children aged 22, 19, and 17.
  • Tracy has two children aged 12 and 10.
  • Robert’s 22-year-old also has a child, age 1.

Edward names all of these people as beneficiaries in the trust he creates. He might also create provisions that add other grandchildren or great-grandchildren as they are born, but the age of the trust depends on when the above people pass away.

Imagine that the 1-year-old listed above is the last person alive of those who were alive at the time the trust was created. If this person lives to age 95, the trust would last 21 additional years. All in all, the trust would protect the family’s wealth for 115 years.

What Are Some Benefits of a Dynasty Trust?

One of the biggest benefits of a dynasty trust is that it can help you protect assets against your heirs’ creditors, bankruptcies, divorcing spouses or other claims. Some trusts also allow you to have a say in how wealth is used or managed in the future, even when you are no longer able or present to give such direction yourself.

Another benefit of a dynasty trust is that it allows affluent families to avoid being hit with sizable estate taxes when transferring assets between generations. You do need to consider the implications of taxes and other financial matters when you first fund the trust. You may also need to consider income tax and other implications related to disbursements, and an experienced trust attorney can help you think long-term to maximize protections and savings.

Are There Any Downsides to a Dynasty Trust?

To provide the type of immediate and ongoing protection described above, dynasty trusts must be irrevocable. For this reason many families use revocable trusts while they are alive. After the person who created the trust dies, the trust becomes irrevocable – and it is at this point families have the trust act as a dynasty trust. It used to be very difficult to make changes to this type of trust, but that is not the case anymore. Dynasty trusts can be written so that they can be amended after they become irrevocable. But it is still important to consider your goals and the implications of the trust on future generations.

Those considerations necessarily require you to make educated guesses about future family finances and needs. An estate law team can help you approach this task by looking at the big picture and then considering how every detail might be relevant within that comprehensive outlook.

What Other Types of Trusts Might Help Safeguard Generational Wealth?

Other types of trusts might also help you safeguard wealth for future generations. Options can include Capital Gains Avoidance Trusts, Irrevocable Life Insurance Trusts, and Spousal Lifetime Access Trusts.

Each type of trust supports different financial goals and has different mechanisms to protect your assets. Understanding which trusts are right for you and your family is critical to being able to plan ahead appropriately and protect generational wealth. You may find that you need more than one type of trust to protect your assets.

Work With the Team at Boyd & Boyd to Protect Your Wealth

The experienced estate law team at the Law Offices of Boyd & Boyd, P.C., can provide the insight you need to understand trust options and what might work best for your family. To find out more about our services and schedule an appointment to get started with trust creation, give us a call at 508-444-9688.