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As the average American inherits around $1,500 from their grandparents, the uber-rich employ sophisticated financial strategies like dynasty trusts to pass on millions to distant heirs, avoiding hefty wealth transfer taxes. The Trump administration’s tax cuts and loosening limits on generation-skipping trusts have facilitated this trend among affluent families, such as the Pritzkers, Wrigleys, and Bezos.
Dynasty trusts, increasingly popular due to a rising generation-skipping transfer tax exemption, enable affluent taxpayers to provide for up to forty generations, subject to tax only once. Aimed initially at preventing families from evading estate taxes by gifting to grandchildren, the exemption has surged from $1 million in 1986 to $12.92 million per individual and $25.84 million per married couple in 2023.
The impending halving of the tax exemption at the end of 2025 has led some wealthy families to consider establishing dynasty trusts before sunset, with potential legislative changes influencing their decisions.
Dynasty trusts, which can last up to 1,000 years in certain states, involve appointing corporate trustees and are funded with income-producing assets like family businesses. While the heirs don’t own assets outright, they receive income from the trust, subject to income tax but not generation-skipping tax (GST).
Northern Trust estimates substantial tax savings using a Delaware dynasty trust, where a $12.92 million legacy over 75 years could compound to $501.7 million instead of $108.4 million with successive transfer taxes, assuming a 5% after-tax return.
Beyond tax advantages, dynasty trusts offer asset protection from creditors and divorces, making them attractive for preserving family businesses and shielding assets. However, critics, including tax strategist Jere Doyle, caution against trusts lasting indefinitely, raising concerns about wealth accumulation impacting future generations’ motivation and societal contributions.
As the wealthy navigate potential tax changes, dynasty trusts remain a complex yet potent tool for the preservation of generational wealth. The balance between financial planning and societal impact remains crucial for those venturing into centuries-long wealth strategies.
