Milpitas, CA estates & probate attorney Elijah Keyes discusses how a dynasty trust works. A dynasty trust serves as a strategic instrument crafted to safeguard individuals of a younger generation from potential financial setbacks caused by creditors or other parties, including the federal government and spouses. Typically, this trust is established by a parent for a child or by a relative for a niece or nephew, instead of directly transferring assets to the beneficiary.

In this arrangement, the assets are conveyed into the dynasty trust, where the child may eventually, upon reaching a designated age, become a trustee. This allows the child some level of control over investments and withdrawals, with the child serving as the exclusive beneficiary. Importantly, during the child’s lifetime, as long as the assets remain within the trust, it becomes exceedingly challenging for creditors to access these funds. The structure of a dynasty trust provides a robust layer of protection against such intrusion.

Furthermore, a dynasty trust offers a protective shield against the financial consequences of divorce. Since the assets in the trust are not considered the property of the beneficiary, they remain separate and protected from being commingled with marital assets, thus reducing the risk of loss in the event of a divorce.

While less commonly utilized, a dynasty trust can also serve as a strategic tool for mitigating estate taxes. By placing assets into this trust, individuals can potentially shield those assets from federal estate taxes, as the assets held within the trust are often not subject to taxation upon the child’s passing. This unique tax-driven trust structure can help assets grow significantly over time without incurring additional tax liabilities, thereby preserving wealth for future generations.