Dynasty Trusts: Preserving Family Wealth Across Multiple Generations

The Problem Dynasty Trusts Solve

In most developed countries, wealth is taxed at each generational transfer. In the United States, the federal estate tax applies at 40% on estates exceeding USD 13.99 million (2025 threshold; scheduled to revert to approximately USD 7 million in 2026 unless Congress acts). In the United Kingdom, inheritance tax applies at 40% on estates exceeding GBP 325,000 (with a residence nil-rate band of GBP 175,000 for direct descendants inheriting a home).

Without planning, a family fortune of USD 100 million can be reduced to under USD 13 million after just three generations, assuming a 40% tax at each transfer. A dynasty trust is designed to hold assets outside any individual's taxable estate — indefinitely — so that the wealth passes from generation to generation without triggering transfer taxes.

How a Dynasty Trust Works

A dynasty trust is a discretionary trust established in a jurisdiction that permits trusts of unlimited duration. The settlor transfers assets to the trust, which holds them for the benefit of the settlor's descendants and potentially other beneficiaries. The trustee makes distributions at its discretion, guided by a letter of wishes.

The critical features that distinguish a dynasty trust from an ordinary trust are:

• Perpetual duration: The trust is not subject to a perpetuity rule, so it continues indefinitely
• Generation-skipping transfer (GST) tax planning: For US persons, the trust is structured to use the settlor's GST exemption (USD 13.99 million in 2025) to shelter the trust from GST tax
• Discretionary distributions: No beneficiary has a vested interest in the trust assets, so the assets are not included in any beneficiary's estate
• Spendthrift provisions: Beneficiaries cannot assign their interests, and creditors cannot reach them

Jurisdictional Selection

The choice of jurisdiction is fundamental. The trust must be governed by the law of a jurisdiction that:

1. Has abolished the rule against perpetuities
2. Does not impose income tax, capital gains tax, or estate tax on the trust
3. Has robust asset protection legislation
4. Has a well-developed trust law and competent judiciary

Offshore Jurisdictions with No Perpetuity Rule

Jurisdiction	Perpetuity rule	Trust legislation	Notes
Jersey	Abolished (2018)	Trusts (Jersey) Law 1984	Tier 1 reputation, regulated trustees
Guernsey	Abolished (2007)	Trusts (Guernsey) Law 2007	Tier 1, strong regulatory framework
BVI	Abolished (2013)	Trustee Act (as amended)	VISTA available for company shares
Cayman Islands	150 years	Trusts Law (2021 Revision)	Not truly perpetual
Bermuda	Abolished (2009)	Trusts (Special Provisions) Act 1989	Well-regarded judiciary
South Dakota (US)	Abolished	South Dakota Codified Laws	No state income tax; US situs
Nevada (US)	365 years	Nevada Revised Statutes Ch. 166	No state income tax

US Domestic Dynasty Trusts

Several US states — South Dakota, Nevada, Alaska, Delaware, New Hampshire — have enacted legislation permitting perpetual or near-perpetual trusts. For US settlors, a domestic dynasty trust offers certain advantages:

• No foreign trust reporting (Forms 3520/3520-A)
• No PFIC or CFC issues on underlying investments
• Use of the GST exemption is straightforward
• State-level asset protection statutes apply

The disadvantage is that the trust remains within the US judicial system, making it vulnerable to US court orders, IRS liens, and potential changes in federal tax law.

GST Tax Planning for US Persons

The generation-skipping transfer tax is a separate tax (at 40%) imposed on transfers to persons two or more generations below the transferor — for example, a grandfather's transfer to a grandchild. Without the GST exemption, a transfer to a dynasty trust would trigger GST tax when the trustee distributes to grandchildren or more remote descendants.

Each US person has a lifetime GST exemption equal to the basic exclusion amount (USD 13.99 million in 2025). By allocating the GST exemption to the transfer into the dynasty trust:

• All assets in the trust — including growth and income — are exempt from GST tax in perpetuity
• Distributions to grandchildren, great-grandchildren, and all subsequent generations are GST-free
• The trust assets are not included in any beneficiary's estate for federal estate tax purposes

Timing is critical: The GST exemption amount is scheduled to be approximately halved in 2026 when the Tax Cuts and Jobs Act 2017 provisions sunset. Establishing and funding a dynasty trust before 1 January 2026 allows the full exemption to be utilised.

Structure and Governance

Trust Instrument

The trust deed for a dynasty trust should address:

• Beneficiary class: Defined broadly to include the settlor's descendants, their spouses, and potentially charitable organisations
• Distribution standards: Typically health, education, maintenance, and support (HEMS standard for US tax purposes), with broader discretion for the trustee
• Trust protector: Power to amend administrative provisions, change governing law, appoint successor trustees, and add or exclude beneficiaries
• Investment policy: Power to invest in any asset class, including illiquid assets, private equity, and real estate
• Decanting provisions: Authority for the trustee to distribute trust assets to a new trust with modified terms (subject to governing law)

Governance for Multi-Generational Structures

As the trust endures across generations, governance becomes increasingly important:

• Family council: An advisory body comprising senior family members who meet regularly with the trustee to discuss investment strategy, distribution requests, and family governance
• Distribution committee: A committee (which may include non-trustee family members) that reviews and approves distribution requests
• Education provisions: The trust deed may require beneficiaries to complete financial literacy programmes before becoming eligible for distributions
• Incentive provisions: Matching distributions based on the beneficiary's earned income, encouraging productive activity

Investment Considerations

A dynasty trust with a 100+ year time horizon has a fundamentally different investment mandate than a trust with a 25-year duration:

• Higher equity allocation: The extended time horizon permits a higher allocation to equities and growth assets, as short-term volatility is irrelevant
• Illiquid investments: Private equity, venture capital, real estate, and timber can be held without concern about near-term liquidity needs
• Concentration risk: If the trust holds a single asset (e.g., shares in a family business), the trustee should consider diversification over time — unless the trust is governed by a VISTA-type regime
• Inflation protection: Over 100+ years, inflation is the primary risk. The investment strategy must prioritise real (inflation-adjusted) returns

Common Pitfalls

• Failing to allocate GST exemption: If the settlor does not timely file a gift tax return (Form 709) allocating the GST exemption, the trust will not be GST-exempt, and the entire planning objective is defeated
• Including the settlor as a beneficiary: If the settlor can benefit from the trust, the assets are included in the settlor's estate under IRC section 2036
• Granting a general power of appointment: If any beneficiary holds a general power of appointment over trust assets, those assets are included in that beneficiary's estate under IRC section 2041
• Ignoring state income tax: Some US states (California, New York) impose income tax on trusts with resident beneficiaries, even if the trust is sitused in a no-income-tax state
• Inadequate trustee succession planning: Over 100+ years, individual trustees die and corporate trustees merge. The trust deed must contain robust succession provisions.

Key Takeaways

• Dynasty trusts preserve family wealth across multiple generations by holding assets outside any individual's taxable estate indefinitely
• Jurisdiction selection is critical — the trust must be governed by a law that permits perpetual trusts and does not impose local taxes
• For US persons, the GST exemption must be allocated at the time of the transfer; the current elevated exemption expires after 2025
• Governance mechanisms — family councils, distribution committees, incentive provisions — are essential for structures intended to last more than two generations
• The investment strategy must reflect the trust's multi-century time horizon, prioritising real returns and accepting short-term volatility
• Professional coordination between trust counsel, tax advisers, and investment managers is required at establishment and on an ongoing basis