Many persons having children, grandchildren or other close relatives often wish to create a trust for, or implement some other form of estate plan that will benefit these individuals, whether during lifetime or upon death. The creation of a so-called “Dynasty Trust” is often considered. Very simply stated, a “Dynasty Trust” is a trust that may continue its existence indefinitely or for many years (e.g., 80 years is typical). The Dynasty Trust would make distributions to its respective beneficiaries in accordance with the trust terms applicable to that particular Dynasty Trust. In this regard, several Dynasty Trusts could be created by the same trust creator (called a “grantor”), with each Trust being specially tailored to suit each beneficiary’s specific circumstances (for example, one beneficiary may have young children, while another could have only adult children, thus requiring different dispositive provisions in each of the trust instruments).

The beneficiaries of a Dynasty Trust are typically the grantor's children, and after the death of the grantor’s last child, the grantor's grandchildren or great-grandchildren usually become the beneficiaries. The Dynasty Trust is “irrevocable”, meaning that once it is created, the grantor cannot take the property back. There are limits as well on any control by the grantor over the assets and other terms that restrict grantor control (e.g., inability to amend the trust terms).

The Dynasty Trust itself would be a US taxpayer, paying Federal income tax, on income and gains in accordance with graduated tax rates. To the extent that a trust makes distributions of its income to a beneficiary, however, the beneficiary himself, and not the trust would pay the income tax. On the other hand, if the trust retains the income rather than distributes it, the trust will pay income tax and not the beneficiary. Use of trusts in today’s tax environment can result in the trust paying LOTS of tax dollars that, had the income been earned by the individual beneficiary himself (rather than the trust), would not be paid. The current maximum income tax rate is now at 39.6% -- plus – there is the possible additional Medicare surcharge tax of 3.9% on net investment income. Due to the very high tax rates on trusts, trustees are often paying out all income to the beneficiaries instead of retaining it in the trust. To illustrate the harshness of the tax rates on trusts versus individuals, consider this: The maximum tax rate of 39.6% applies to all taxable income over $450,000 for taxpayers who are married filing jointly; but the maximum tax rate of 39.6% applies to all taxable income over $11,950 when the taxpayer is a trust!

You must have proper tax advice before creating any kind of trust! The rules become far more complex if any foreign (non-US) trust is created.