Dynasty trusts ensure that wealth gets passed down to successive
generations. The special tax provisions in this wealth-building vehicle allow you to amass a fortune relatively quickly — so much so that $1 million can turn into roughly $20 million over the course of only three generations (assuming that the trust’s balance grows by a net of 6%, annually).
However, with so much wealth going to such a (potentially) small clique of future progeny, you may be wondering how non-family members can also be made to benefit from your fortune-accruing efforts. We’re referring to the philanthropic considerations so common among the truly noble wealthy.
For those thinking along these lines, there’s good news: charitable beneficiaries are also allowed to be included within your dynasty trust.
Charitable Beneficiaries and Dynasty Trusts
The charitable beneficiary option that comes with dynasty trusts is less about avoiding your descendants becoming “too rich” and more about ensuring that those less fortunate are also taken care of.
To ensure the latter, you have a few options:
Option 1: Assuming that the assets in your dynasty trust are designed to avoid transfer taxes upon the death of one generation (which is a safe assumption to make), you could require that a portion of the money saved due to this tax break — say 10% — be given to charity at such times (i.e. upon the death of one generation).
Option 2: Your dynasty trust could require either
- more frequent distributions of the 10% figure mentioned above to charity
- a higher outright distribution percentage of the money accrued from transfer tax savings be given to charity.
For instance, if your trust is required by law to terminate after about 90 years, it could be set up to distribute 20% of its transfer tax savings to charities in predetermined yearly intervals. This amounts to (potentially) millions of dollars going to specified charities .
Charitable Lead Trusts
A charitable lead trust (CLT) can be connected to your dynasty trust as a way of carrying out points one and two mentioned in the previous section. CLTs ensure that both charity and private beneficiaries benefit from your financial planning. Here’s a brief overview of how it works:
- Once established, cash or other assets get transferred to the CLT.
- The charity you designate in the CLT agreement then receives payments from it annually for a term you select. (Note that these payments must be a stated percentage of the CLT assets, which are valued annually).
- When the term of your charitable payments terminates, the remaining CLT assets get distributed to a non-charitable beneficiary (i.e. private person such as a relative) of your choosing.
- The assets contained within the dynasty trust then serve to benefit your heirs in perpetuity.
Ensuring Your Legacy
The investing options in this article have by no means been described in their fullest detail. Furthermore, as establishing a dynasty trust is intertwined with leaving a legacy, you’ll want to make sure it’s done effectively. Let’s ensure this by discussing your options.