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Simple English definitions for legal terms
dynasty trust
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A quick definition of dynasty trust:
A dynasty trust is a special type of trust that lasts for many years and can benefit multiple generations of a family. The main goal of this trust is to avoid taxes and provide a source of income that can last beyond just one generation. The person who creates the trust can contribute money without having to pay taxes, and the beneficiaries of the trust won't have to pay taxes either. The trust is set up in a way that the person who created it can't control it, and they have the freedom to decide how the beneficiaries can receive income from the trust. Some states have rules that limit how long the trust can last.
A more thorough explanation:
Dynasty trusts are trusts that are created to last for many years and multiple generations. The main goal of these trusts is to avoid taxes as much as possible and create a source of income that will last beyond just one generation. The person who creates the trust (the grantor) can contribute an amount up to the current gift tax limit without having to pay any taxes. After that, the only taxes on the assets of the trust may be income taxes, which can be avoided through certain investments. Most importantly, the beneficiaries of the trust will not have to pay any taxes.
The trust must be set up as an irrevocable trust, which means that the grantor or beneficiary cannot control it. The grantor has a lot of freedom to decide how the beneficiaries may receive income from the trust, with only some states limiting the length of the trusts by the rule against perpetuities.
Example 1: John sets up a dynasty trust for his children and grandchildren. He contributes $11 million to the trust, which is the current gift tax limit. The trust is set up to last for 100 years and the beneficiaries can receive income from the trust during their lifetimes. John's goal is to avoid estate taxes and provide a source of income for his family for many generations.
Example 2: Sarah sets up a dynasty trust for her grandchildren. She contributes $5 million to the trust and sets it up to last for 50 years. The beneficiaries can receive income from the trust during their lifetimes, but the trust cannot be used to pay for their education or healthcare expenses. Sarah's goal is to provide a source of income for her grandchildren that will last beyond her lifetime.
These examples illustrate how dynasty trusts can be used to provide a source of income for future generations while avoiding taxes. The grantor has a lot of control over how the trust is set up and how the beneficiaries can receive income from it. By setting up the trust as an irrevocable trust, the grantor can ensure that the assets in the trust are protected from creditors and other legal issues.