The average American inherits about $1,500 from their grandparents, per analysis by the Wharton School at the University of Pennsylvania. The uber-rich, on the other hand, can pass on millions to grandchildren.
And thanks to loosening limits on generation skipping-trusts and tax cuts made during the Trump administration, the wealthy are also skipping out on paying hefty wealth transfer taxes by leaving their riches to their distant heirs.
Some of America's wealthiest families, such as the Pritzkers, who own Hyatt Hotels, the Wrigleys of the titular chewing gum fortune, and the Bezos family, usegeneration-skipping truststo preserve their wealth. Former Bridgewater CEO Dave McCormick, who is running for Senate, has as much as $2.25 million stashed in this type of trust, according to his financial disclosure of at least $123 million in assets. So-called dynasty trusts allow affluent taxpayers to provide for as many as forty generations and only be subject to tax once.
Dynasty trusts have grown in popularity as the generation-skipping transfer tax exemption has skyrocketed, according to Sandy Christopher, partner at Withers Bergman. Better known as GST, the taxis intended to keep families from avoiding estate tax by gifting to grandchildren or another relative at least two generations younger rather than their children.
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In 1986, the exemption was $1 million. Thanks to tax cuts made in 2017, itis now equivalent to the federal estateand gift tax exemption of $12.92 millionper individual and $25.84 million per married couple.
"As you have a higher exemptions, it becomes much more meaningful to create an estate that can last as long as possible," Christopher told Insider. "The generation-skipping tax exemption is very, very powerful for people making significant gifts and creating trusts and putting together wealth structures."
The tax exemption will be cut in half at the end of 2025. Some rich families are holding off on establishing dynasty trusts in the hopes that further legislation will extend the tax cut, which depends on the makeup of Congress, BNY Mellon Wealth Management tax strategist Jere Doyle told Insider. Clients may rush to set up dynasty trusts before the exemption sunsets if it seems unlikely.
This is how dynasty trusts work
Dynasty trust refers to the longevity of the trust rather than a specific type of trust, but here is how they generally work.
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Historically, trusts could only last 21 years after the death of a beneficiary who was alive when the trust was created. This rule against perpetuities dated back to 17th-century England.
But in the past four decades, more than half the states in the United States have either repealed this common law or significantly extended trust limits, allowing dynasty trusts to last as long as 1,000 years in states like Florida and Wyoming. In Delaware, trusts can last indefinitely, though certain restrictions include a time limit on real estate held in trusts.
The length of the trust is predetermined when it is established. Since dynasty trusts last a long time, a corporate trustee is typically appointed, such as a bank or another financial institution like JPMorgan or Northern Trust.
The value of the trust at formation is subject to GST, which is a 40% flat tax above the exemption. There are few limitations on funding a dynasty trust, but it is best to use income-producing assets expected to increase in value, such as a family business.
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The heirs do not own the assets outright but have a right to receive income from the trust, which is subject to income tax but not GST. In the case of real estate, the heirs hold a life estate, meaning they have no ownership, but they do have the right to live on the property and receive its profits until they die.
Even if the trust lasts centuries and its assets appreciate exponentially, the generation-skipping tax is only paid once. Whatever remaining assets go to the final heirs and count towards their taxable estate.
It is hard to predict the tax savings of a trust designed to last decades or centuries as tax law will likely change. But Northern Trust estimated that if you bequeathed $12.92 million and the family paid a transfer tax with each successive generation over 75 years, the fortune would compound to $108.4 million, assuming a 5% after-tax rate of return. Using a Delaware dynasty trust to avoid transfer tax, on the other hand, the assets would compound to $501.7 million, nearly $400 million more.
Tax savings aren't the only advantage
Most clients of Christopher's aren't interested in preserving their wealth for perpetuity.
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"When you really talk with people, they're not really thinking of this in terms of that time period," said Christopher. "They have short or shorter-term concerns about their family."
They are usually drawn to dynasty trusts to keep businesses within their families and protect assets from creditors. Thanks to an 1875 Supreme Court case, life estates are protected from creditors if the trust has a spendthrift provision. Dynasty trust assets are also shielded in the event of a divorce.
Even for long-time lawyers like Doyle, the idea of a trust lasting 40 generations is mind-boggling.
"I just can't fathom having something last a thousand years," he told Insider.
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Doyle thinks 90 to 100 years is plenty long for a trust and has advised clients against forming trusts that would last virtually forever.
"Maybe it sounds good from a tax planning point of view, but you have to think about it in practical terms too. Who are your grandchildren going to be? Who are your great-grandchildren going to be," he said. "It could build up to tons and tons of money, and these people will never have an incentive to work or make anything of themselves, give back to society."
Editor's note: This article was originally published in May 2023 and was updated in February 2024 to add details about Dave McCormick's dynasty trust.
