The term “dynasty trust” relates to the duration of the trust. In theory, at least, the dynasty trust is intended to last in perpetuity or as long as the grantor of the trust has descendants. It may be, however, that a shorter period, such as for the life of a child, will accomplish the creator’s objectives.

Parents may provide in their revocable trust that, upon their death, their assets pass to the children and are held in trust for the benefit of each child for the child’s entire life. Then, upon the child’s death, the assets pass to their children. This may be considered a form of “dynasty” trust. An individual may also create an irrevocable trust during his or her lifetime for the benefit of a child, and gift assets to the trust. If the trust is for the life of the child, or longer, the trust may be considered as a “dynasty” trust.

One purpose for establishing such a long term is to avoid estate tax upon the death of a child (this may also be referred to as a “generation-skipping” trust). A parent establishes a trust for a child, either during their life or upon their death, and elects in a gift or estate tax return to utilize all or a portion of their generation skipping tax exemption. Then when the child dies the trust assets pass to the child’s heirs without estate tax.

Another purpose for such a long term might be that the child will never be able to manage assets because of an incapacity or inability. If parents provide in a revocable trust that upon their death, the child’s inheritance is to be held in trust, the question is at what age the child will be sufficiently mature to competently manage the assets. If the answer is never, because the child is a spendthrift, is easily influenced and lacks self determination, has substance abuse problems, suffers from a form of mental illness, or is developmentally disabled, the term of the trust would, by necessity, be for the life of the child.

It may be that the child has no need to be protected from their own indiscretions, but that the creator desires to arm the child with a degree of protection from the outside world. A third purpose may be to insulate assets from claims of the child’s creditors or from spouses in the event of a divorce. In such event, the child does not own the assets, the trustee holds title to the trust assets for the benefit of the child and the child may (or may not) possess a degree of control depending upon the extent of protection that the creator desires to achieve.

Under the laws of many states, including California, the duration of trusts is limited to a period measured by a complex rule called the Rule Against Perpetuities (essentially the lives of all beneficiaries, plus 21 years). Today, a number of states (most notably Nevada, Delaware, South Dakota and Alaska) have enacted laws that eliminate or modify this rule and permit trusts that continue for very long periods, including trusts that may run “forever”. If the purpose of the trust, however, is to address the needs of the child, rather than to span multiple generations, it may be sufficient for California residents to form the trust in California rather than incur the additional cost and complexity of forming the trust in another state.

A dynasty trust is a technique designed to allow its creator to pass wealth to successive generations of descendants with the distributions and operation of the trust being controlled by the terms initially established by the grantor of the trust.