Dynasty Trusts – How to Help Your Family Avoid Estate Tax & Why Jurisdiction Matters (South Dakota)

Hi, my name is Stuart Green. I am a trust, tax, and asset protection attorney. If you like this video, make sure to subscribe to our channel, as we put out new content all the time. Today’s video is about Dynasty Trusts. This is a term that many people have heard, but a lot of people don’t really know when they need a Dynasty Trust or why they should consider setting one up.

A Dynasty Trust is an irrevocable trust, and it’s usually set up for the purpose of passing family wealth from generation to generation indefinitely. So, what is the beauty of a Dynasty Trust?

First, it provides asset protection from creditors and predators. Think about lawsuits, malpractice suits, negligence suits, and even bankruptcy. It’s especially beneficial in the case of divorcing spousal claims, which is something people are really concerned about—making sure that family wealth accumulated over time stays in the family and doesn’t end up with other families when something unfortunate happens.

Second, it offers tax planning strategies. To the extent that you’re putting assets into a Dynasty Trust, those assets can appreciate in value free of any transfer taxes, such as estate tax or generation-skipping tax.

A little background: not all states allow for Dynasty Trusts. Many states have what’s called a Rule Against Perpetuities, which means there is a shelf life for the existence of a trust, and at some point, the trust assets must be distributed to the beneficiaries. This is when estate tax and generation-skipping tax issues will arise.

Here’s an example: let’s say that today, Mom and Dad don’t have an estate tax issue. Maybe they have a few million dollars and aren’t in the taxable estate range yet. A Dynasty Trust could still make sense because they may be passing $5 million to one or two children. That $5 million could easily turn into $10 million, $20 million, $40 million, or even $80 million over time, possibly within the lifetime of their children or definitely within their grandchildren’s.

The point is, at some point in the future, a new generation that benefits from that family wealth will likely face an estate or generation-skipping tax issue. The way to avoid that is to do the planning now. A lot of people think, “Oh, I don’t have a tax issue now, so I don’t need to do planning.” That’s not the right approach. The right approach is to address this proactively before it becomes a huge issue. Planning is much easier to do proactively rather than reactively.

One of the things to consider with Dynasty Trust planning is whether your state allows for Dynasty Trusts. If it doesn’t, you need to look at where you can create a Dynasty Trust. Additionally, are there income tax consequences to having a Dynasty Trust set up in a certain state? The answer is yes, absolutely. Some jurisdictions are more advantageous than others.

South Dakota is one of those jurisdictions. They allow for trusts to exist in perpetuity, meaning they can last forever, and they don’t have a state income tax. Nevada is also recognized as a great trust jurisdiction, but the problem with Nevada is that they don’t have trusts that can exist in perpetuity. They have a long shelf life, but eventually, some generation will have to deal with estate tax or generation-skipping tax if they don’t do Dynasty Trust planning correctly.

That’s why I’m a big fan of South Dakota trust planning. It brings together the best of all worlds with Dynasty Trust planning, as well as the no-state-income-tax benefit, which will help the family wealth continue to grow and generate income and appreciation.

So, when considering a Dynasty Trust, think about asset protection, estate tax, generation-skipping tax, and income tax planning, as well as the creation of family wealth and maintaining it for future generations.