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 several states that have abolished the rule against perpetuities, or for a defined statutory maximum (typically 360 to 1,000 years) in others. 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 further estate or GST tax.

The tax problem it addresses

Without a dynasty trust, wealth passing through three or four generations of a family pays transfer tax at each generation. With a properly structured and exempt dynasty trust, wealth grows in the trust without further transfer-tax cost until distribution or termination — potentially for centuries.

Mechanics

• Settlor funds the trust with cash, marketable securities, or other property — up to available basic exclusion amount and GST exemption.
• Settlor allocates GST exemption to produce 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 RAP in 1983; Delaware in 1995 (for personal property held in trust); Wyoming, Nevada, Alaska, others followed.

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 trust sited in South Dakota with a South Dakota trustee may avoid state income tax on undistributed income; a New York or California beneficiary's residence does not impose tax on the trust under Kaestner, 588 U.S. 262 (2019), but each state's connection test must be examined.
• 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 fee (commonly 50-100 basis points for institutional trustees, lower for individual trustees with corporate co-trustee); 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.
• Reciprocal SLATs. Each spouse establishes a dynasty trust for the other, doubling exemption use while preserving cross-spousal access (subject to reciprocal-trust doctrine concerns).

Recent developments

The 2025-end sunset of the doubled exclusion is the dominant pending variable. Significant dynasty-trust funding through 2025 has been a priority for high-net-worth taxpayers. Anti-clawback regulations under §2010(c)(3) confirm pre-sunset gifts will not be recaptured.

Kaestner in 2019 limited the reach of state income tax on non-resident trusts based purely on beneficiary residence. State responses have been mixed; some states have continued to assert connection-based tax claims.

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

Reviewed May 2026