Until 2021, there wasn’t much point in discussing the merits of a true Dynasty Trust because they weren’t legal in Texas. The Texas state constitution prohibits perpetuities—or securities that continue indefinitely—so Trusts were always limited to 21 years beyond the lifetime of the youngest beneficiary. Effectively, that meant that any Trust created in Texas could not be valid for more than about 100 years. However, with the passage of a new law in 2021, Trusts can now last up to 300 years after the last beneficiary dies. What does this mean for your family? It depends on your estate planning goals.
How Does a Dynasty Trust Work?
For the most part, a Dynasty Trust is a tool for fairly high-net-worth families because it is designed to support several generations. In order to do that, it has to hold significant assets. However, anyone who wants to cement a legacy for their children, grandchildren, great-grandchildren, and beyond should certainly learn more about a Dynasty Trust to see if it’s right for them. Some advantages of this type of irrevocable include:
- Tax benefits. The federal gift, estate, and transfer tax exemptions that apply to other irrevocable trusts also apply to Dynasty Trusts and will benefit several generations.
- Benefits multiple generations. The grantor can leave a legacy that supports future generations and become a benefactor for descendants who won’t be born for decades.
- Future tax savings. A Dynasty Trust does not provide tax savings when it is created, but the assets in the trust are not counted when federal estate taxes are calculated, which provides considerable future tax savings in a state like Texas with no income tax.
- Control of asset distribution. The grantor can set any conditions they choose to control how and when beneficiaries get their inheritance. For example, the grantor could ensure that heirs who would squander the money would not have free access to their inheritance.
- Protection from creditors. A spendthrift provision should be included to protect Trust assets from beneficiaries’ debt, divorce, or lawsuits.
While these benefits are similar to those offered by shorter-term Irrevocable Trusts, the Dynasty Trust provides a new opportunity for Texans to think about how their assets and investments could benefit their descendants for several centuries.
There Might Be Legal Challenges to the New Law
The Texas constitution states, “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed.” This provision was included in the constitution to prevent people from building empires that tied up land and assets for generations. A Dynasty Trust is technically a perpetuity as it allows a family to hold on to assets for over 300 years. The new law does limit the holding of real estate to a period of no more than 100 years, but there could still be considerable opposition to the law by supporters of the ban on perpetuities in the Texas constitution. If the law is found to violate the constitution, it could be overturned by the courts, or it could be sent to voters to approve a constitutional amendment. Either way, this could be a wait-and-see situation.
Other Types of Irrevocable Trusts Are Available
The main advantages of an Irrevocable Trust are tax savings, protection from creditors, and protection of assets from long-term care providers. An Irrevocable Trust does not have to be a Dynasty Trust to be effective for these purposes. If these are your goals, we invite you to contact one of our Estate Planning offices in Texas or Arkansas to talk about your options.
Are You Looking for an Estate Planning Attorney in Texarkana, TX?
If you are looking for Estate Planning advice, you need to speak with an experienced Estate Planning attorney as soon as possible. Contact us online or call our Texarkana office directly at 903.223.5653. We also have offices in Tyler, Paris, and Longview, as well as Magnolia, AR!