Trust Law/Level V · Tax and legacy/5.3 Generations and charity/Lesson 1
Dynasty trusts
How long-lasting trusts span generations where the rule against perpetuities has been abolished or extended, and how the GST exemption and governance fit in.
Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.
The lean path
The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.
- With a 2026 GST exemption of $15,000,000 per person, most families pass wealth to grandchildren with no GST tax; tuition and medical bills paid directly to the provider are not generation-skipping transfers at all (IRC §2611(b)(1)), and need no trust or return.
- Outright annual-exclusion gifts to a grandchild, up to $19,000 in 2026, carry a zero inclusion ratio under §2642(c); a gift in trust qualifies only if the trust is solely for that grandchild and would be in the grandchild’s estate.
- A dynasty trust stays free of GST tax however much it grows if allocated exemption gives it a zero inclusion ratio; allocate on a timely Form 709, since allocations are irrevocable, and accept that assets get no §1014 step-up at each generation.
- Naming a trustee in South Dakota, where the common-law perpetuities rule is not in force (SDCL 43-5-8), or Nevada (365 years) allows long duration; a state cannot tax undistributed trust income merely because beneficiaries with no right to demand it live there (Kaestner, 2019).
MaterialsLesson 5.3.2, on the generation-skipping transfer tax, and lesson 5.3.3, on the rule against perpetuitiesThe perpetuities statute of the state whose law would govern the trustThe IRS ‘What’s new, estate and gift tax’ page, for the current GST exemption
Wonder
- How can trust property avoid estate tax as each generation of beneficiaries dies?
- Why did the rule against perpetuities once force trusts to end?
- Who makes decisions for a trust that outlasts everyone who created it?
Explore
- A dynasty trust is a trust designed to last for many generations. The common-law rule against perpetuities, which began with the Duke of Norfolk’s Case (1682) and was settled in Cadell v Palmer (1833), required interests to vest within ‘lives in being plus 21 years’, which in practice ended most trusts within about two or three generations. Many US states have since abolished or extended the rule. South Dakota declared the common-law rule not in force in 1983; Nevada allows interests to vest within 365 years; Delaware and Alaska also permit very long trusts. Lesson 5.3.3 covers the rule in detail.
- The tax design combines two exemptions. The settlor’s gift to the trust uses part of the basic exclusion, and the settlor can allocate GST exemption to it: $15,000,000 per person in 2026 (One Big Beautiful Bill Act, July 2025). The generation-skipping transfer tax applies to transfers to ‘skip persons’, such as grandchildren, at the highest federal estate tax rate, currently 40%, multiplied by the trust’s ‘inclusion ratio’ (lesson 5.3.2). If enough exemption is allocated to give an inclusion ratio of zero, later distributions and terminations are generally free of GST tax, however much the trust grows.
- Estate tax is avoided at each generation only if the beneficiaries’ interests are drafted so the property is not included in their own estates. A beneficiary who receives distributions at a trustee’s discretion, or who holds only a limited power of appointment or a power limited by a standard such as health, education, maintenance and support, generally does not have the trust property in their estate (IRC §2041). A general power of appointment would include it. Property that stays outside every estate also gets no stepped-up basis at each death (IRC §1014).
- A trust meant to last a century or more needs governance that can outlive its founders. Many use a corporate trustee for continuity and split roles: a distribution committee, often of family members or independent advisers, decides on payments; an investment adviser may direct investments; and a trust protector can remove trustees or adapt terms if law or family circumstances change. States such as Delaware, Alaska and South Dakota have statutes on directed trusts and trust protectors. A trust can often use a state’s law by naming a trustee there, even if the family lives elsewhere.
- Dynasty trusts are debated. Critics argue that they let large fortunes pass free of transfer tax for generations, weakening estate taxes meant in part to limit concentrations of inherited wealth, and that very long trusts bind property to the wishes of people long dead. Supporters answer that they keep family assets professionally managed, protect beneficiaries from creditors and divorce, and use an exemption Congress itself provides. Legal scholars have also linked the repeal of perpetuities rules to competition among states for trust business.
- Dynasty trusts have limits. They are irrevocable, so the settlor gives up the property; terms written today must serve descendants not yet born; administration costs continue for decades; and later beneficiaries may disagree with one another or with the trustee. State law can change, and so can federal tax law, including the GST exemption. Some state constitutions restrict perpetuities, which has raised questions about some long-period statutes. This lesson describes how dynasty trusts work and the debate about them; it does not suggest creating one.
Key facts
- The rule against perpetuities began with the Duke of Norfolk’s Case (1682); its ‘lives in being plus 21 years’ period was settled in Cadell v Palmer (1833).
- South Dakota declared the common-law rule against perpetuities not in force (SDCL 43-5-8); Nevada allows interests to vest within 365 years (NRS 111.1031).
- The 2026 federal GST exemption is $15,000,000 per person (One Big Beautiful Bill Act, July 2025).
- The GST tax rate is the highest federal estate tax rate, currently 40%, multiplied by the trust’s inclusion ratio.
- Trust property is generally kept out of a beneficiary’s estate if the beneficiary holds no general power of appointment (IRC §2041).
- Dynasty trusts commonly divide governance among trustees, distribution committees, investment advisers and trust protectors.
Exercise nine, six, three, one
9CollectList up to 9 decisions a long-term family trust would need its terms to answer (some lists are shorter), such as who may receive distributions, who is trustee, how successors are chosen, which state’s law governs and when, if ever, it ends.
6ClusterSort them into 6 categories: beneficiaries, distributions, trustees and successors, investment, governing law and location, and change and termination.
3DistillReduce the 6 categories to 3 groups: decisions that affect estate or GST tax, decisions that affect governance over time, and decisions you would ask an adviser about.
1CrystallizeWrite 1 sentence explaining, in your own words, why abolishing or extending the rule against perpetuities made dynasty trusts possible.
Fact check
Dates, figures and claims checked against the published sources listed below.