Since individual gift and estate tax exemption amount have risen, there has been increased interest in estate planning circles in dynasty trusts. Such trusts are used to pass assets to coming generations, while avoiding as much estate tax as possible. Because dynasty trusts have no expiration date and no minimum distribution requirement.
States which allow dynasty trusts are those in which the traditional rule against perpetuities-which limited the ability to pass gifts to remote descendants-has been either abolished, modified to include an opt-out provision, or otherwise altered.
Dynasty trusts are unique in their ability to produce long-term family wealth. Because dynasty trusts have no expiration date and do not require no minimum distributions, the assets in such trusts can continue to grow indefinitely into the future to provide for future generations.
Because of the increase in gift and estate tax exemptions through the end of next year, more individuals have been interested in taking advantage of dynasty trusts. At present, the estate tax exemption is set at $5 million per individual, and will stay at that amount through the end of 2012. The exemption amount will return to $1 million in 2013 if Congress doesn't take any action. For that reason, some estate planners are advising wealthy clients to take advantage of the benefits of dynasty trusts.
Among the states that permit dynasty trusts, Delaware is among the more highly favored, since it provides extra advantages. In addition to the ease with which trusts can by modified in Delaware and the ability to invest in a broader spectrum of assets, Delaware affords increased creditor protection and the ability to separate dynasty trust assets from divorce proceedings.
Source: Bloomberg, "Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever," Elizabeth Ody, 28 July 2011.