9077 / What is a Delaware dynasty trust?

A Delaware dynasty trust is essentially an irrevocable trust established under Delaware law in order to reduce or eliminate a taxpayer’s estate, gift and generation skipping transfer (GST) tax liability. A dynasty trust gets its name because the trust is intended to benefit multiple generations of beneficiaries. However, some taxpayers may structure these trusts as asset protection trusts by naming themselves as beneficiaries in order to receive distributions at the trustee’s discretion if the need arises.

Delaware trust law is favorable to trusts and is one of the few states allowing the creation of a trust that never expires, permitting the trust assets to pass from generation to generation without the imposition of transfer taxes. Many other states adopt the traditional rule against perpetuities, which provides that a trust can only last as long as the lifetimes of individuals who are currently living (or a specified term of years), plus 21 years.

Further, and importantly, Delaware provides protection against creditors for assets placed in a trust created under Delaware law, unless the transfer was made specifically to defraud a taxpayer’s creditors.¹

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Planning Point: The Delaware statutory scheme provides protection from most creditors, but does allow the assets in a Delaware dynasty trust to be reached in order to satisfy alimony or child support obligations. A person who has suffered death, personal injury or property damage on or before the date the assets were transferred to trust may also be able to reach the trust assets if the trust creator is found liable for the damages caused.²

If a Delaware dynasty trust does not have any Delaware beneficiaries, no Delaware state income or capital gains taxes are imposed upon the trust accumulations and taxes are imposed only when distributions are made.

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Planning Point: Individuals should be advised that though Delaware may exempt trust income from state tax, their own state of residence may impose income or capital gains taxes.

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These trusts can be funded with cash, stock or other assets. Many wealthy taxpayers fund the trust with assets that equal the current transfer tax exemption amount ($12.06 million in 2022, $12.92 million in 2023,  $13.61 million in 2024 and $13.99 million in 2025 in order to avoid transfer taxation. Both the amount that is initially contributed and any subsequent appreciation is removed from the taxpayer-settlor’s estate.