A trust is a means to set aside money or other assets for the benefit of one or more beneficiaries. The trust is managed by a trustee according to the terms of the trust document and state law. Trusts can reduce the tax burden on the creator of the trust and on beneficiaries, and are often used to avoid probate. Nearly all such trusts end at some point, with the assets in the trust distributed to beneficiaries.

There is, however, something called a perpetual trust, or “dynasty trust.” In a perpetual trust, payments of income and principal are made to beneficiaries as long as they live. After their death, payments are made to the children of the named beneficiaries, who are generally subject to the same trust conditions as the initial generation of beneficiaries. The trust continues, generation after generation, until the assets in the perpetual trust are depleted, or until the trust term limit established by state law has expired.

Colorado is one of a majority of states that permit perpetual trusts; the time limit on such trusts in the state is 1,000 years.

Why Create a Perpetual Trust?

A primary advantage of a perpetual trust is avoiding the payment of taxes. Perpetual trusts were created to avoid death taxes: since the trust owns the assets, and the trust never dies, there would never be a death tax on the assets. Congress created the Generation Skipping Transfer Tax (GSTT) in order to avoid such an outcome; however, each individual has an exemption, in excess of five million dollars, to the GSTT. An experienced estate planning attorney can structure a dynasty trust that allows the preservation of significant wealth for future generations while minimizing or avoiding the impact of the GSTT on beneficiaries.

Another reason wealthy individuals may favor perpetual trusts is that these trusts give them an enduring measure of control over the trust assets. If the assets were simply distributed to beneficiaries after the trustmaker’s death, the beneficiaries would have unfettered control over them. Trustmakers can place provisions in their trusts that act as incentives for beneficiaries to take or avoid certain actions.

Perpetual trusts can protect assets from the trustmaker’s creditors, and also from beneficiaries’ creditors, who might be able to seize assets if they were distributed outright to beneficiaries. This protection is achieved by the inclusion of “spendthrift clauses” in trusts which limit creditors’ access to trust assets and distributions.

Potential Perils of Planning for Perpetuity

Trustmakers should be aware that perpetual trusts are irrevocable; once assets are placed in the trust, they cannot be removed. Therefore, if the Trustmaker is creating and funding such a trust during his or her lifetime, it’s important not to commit any more wealth to a dynasty trust than one can comfortably afford to part with.

The type of assets entrusted to a perpetual trust matters, too. In general, assets with a low cost basis and significant appreciation receive a “stepped-up basis” for tax purposes when transferred on death. When low cost basis assets are placed in a perpetual trust, they keep their original cost basis. It’s important to have skilled legal counsel when deciding which assets to place in a perpetual trust.

One issue when creating a perpetual trust is the risk of a legal challenge to a trust, either by a beneficiary’s creditor located in a state where such trusts are unconstitutional, or by beneficiaries themselves. Some beneficiaries are not content with receiving distributions, and want to get their hands on all of the trust assets. If successful, they may have the trust declared invalid. However, such challenges are not easy.

In general, perpetual trusts offer a powerful vehicle for individuals with significant wealth to preserve it for future generations with a vastly decreased tax burden. However, it’s essential to obtain the guidance of an experienced estate-planning attorney who understands the best way to structure and fund the trust, and how to protect it against legal challenges.

To learn more the benefits and risks associated with perpetual or dynasty trusts, contact the experienced estate planning and probate attorneys at Davis Schilken. Call us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.