What Is a Qualified Perpetual Trust?

Trusts can help you control how assets are managed and distributed during your lifetime and after your death. A qualified perpetual trust, commonly known as a dynasty trust, takes that concept further by allowing assets to remain in trust for multiple generations of beneficiaries. Depending on how it is structured and applicable state law, a dynasty trust may provide long-term control over distributions and potential estate and generation-skipping transfer tax planning opportunities. However, these trusts are generally irrevocable and can be complex to establish and administer, making them better suited to some estate plans than others.

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What Is a Qualified Perpetual Trust?

A qualified perpetual trust, also known as a perpetual trust or a dynasty trust, is a type of trust that’s designed to allow the grantor to pass assets on to beneficiaries in perpetuity. In theory, a dynasty trust could last 100 years or more since they don’t terminate until several years after the death of the last surviving beneficiary.

Like other types of trusts, perpetual trusts can be used to avoid probate for certain assets. Probate is the legal process in which someone’s assets are inventoried and liquidated to pay outstanding debts, with the remaining assets being distributed among the deceased person’s heirs either according to the terms of a will or state inheritance laws. Probate can be a time-consuming and expensive, not to mention a public, event which is why some people prefer to avoid it if possible.

What’s different about a qualified perpetual trust is how long the trust lasts. As mentioned, a perpetual or dynasty trust does not terminate until the last surviving named beneficiary to the trust has passed away. And even then, there’s a gap of several years between the beneficiary’s death and when the trust finally ends.

Qualified Perpetual Trusts at a Glance

A qualified perpetual trust is designed to hold and manage assets for multiple generations of beneficiaries. Unlike a trust that distributes its assets and terminates after the grantor’s death, a dynasty trust can potentially continue for decades or longer, depending on the terms of the trust and applicable state law.

Here’s an overview of how these trusts generally work.

Feature	Qualified Perpetual or Dynasty Trust
Primary purpose	Hold and transfer wealth for multiple generations
Trust type	Generally irrevocable
Who creates it?	A grantor or settlor
Who manages it?	A trustee selected according to the trust terms
Beneficiaries	Can include children, grandchildren, great-grandchildren and later generations
How long can it last?	Potentially generations or indefinitely, depending on state law and the trust’s terms
Distribution rules	Established by the trust document and can limit when and how beneficiaries receive assets
Probate	Assets properly transferred to the trust generally avoid probate
Potential tax considerations	May provide estate and generation-skipping transfer tax planning opportunities when properly structured
Key drawback	Assets transferred to an irrevocable trust generally cannot simply be taken back by the grantor
Other considerations	Legal requirements, duration and certain protections can vary by state

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How Does a Qualified Perpetual Trust Work?

A perpetual trust is essentially designed to pass down assets to beneficiaries indefinitely. You set up the trust and transfer assets to it, then name one or more beneficiaries. You also name a trustee to oversee the assets in the trust and specify your wishes with regard to how those assets should be managed.

Once you pass away, the perpetual trust takes effect. The trustee will assume responsibility for distributing trust assets to named beneficiaries, according to the terms you set. You can be as specific as you like with your instructions to ensure that the trust assets will last as long as possible.

For example, say you have two adult children who are in their 40s. You could set a condition that they can only receive monthly interest payments from trust assets, not any of the principal, during their lifetime. You could extend that condition to their children if they have any. In doing so, you can preserve the trust principal and ensure that future generations are able to draw income from it.

You may also set other conditions on the distribution of assets. For example, you might only allow grandchildren to receive principal from the trust once they graduate from college or turn 25, whichever comes first. Or you may set limitations that prevent a beneficiary from withdrawing anything from the trust at all in certain circumstances.

Dynasty trusts are irrevocable, meaning that once you transfer assets to the trust, that transfer is permanent. That means if you have a change of heart about leaving certain assets in the trust, you’re generally unable to reverse the transfer. For that reason, it’s important to be clear about how a qualified perpetual trust might benefit you and what assets to include.

Benefits of a Qualified Perpetual Trust

A woman deciding which assets to place into a trust.

Whether you call it a qualified perpetual trust, perpetual trust or dynasty trust, the advantages are the same. Here are some of the ways in which you might benefit from this type of trust:

Estate tax. Dynasty trusts can yield savings on estate taxes since assets are subject to the estate and gift tax at the time they’re transferred into the trust. That means those assets are not taxed again, relieving a tax burden for the subsequent generations that benefit from them.
Generation-skipping tax. It’s possible that you may decide to leave assets to your grandchildren, rather than to your children, skipping over one generation in favor of another. That strategy can backfire, however, if assets are subject to a generation-skipping tax. A perpetual trust can help to avoid that tax.
Income tax. Assets in a trust are still subject to income tax if they generate income. With a qualified perpetual trust, you can minimize this taxation by transferring assets that produce minimal or no income.
Greater control. One of the main reasons people consider dynasty trusts is the control factor. You can have a say in how your assets are managed for years to come, even after you’ve passed away. And you can be as specific as you like about when and how those assets can be distributed to your beneficiaries.

How Are Qualified Perpetual Trusts Taxed?

Taxes are an important consideration when establishing a qualified perpetual or dynasty trust. These trusts may provide opportunities to limit transfer taxes across multiple generations, but simply placing assets in a dynasty trust does not automatically eliminate estate, gift or generation-skipping transfer taxes. The outcome depends on factors such as how the trust is structured, when and how assets are transferred, and which tax exemptions apply.

Estate and Gift Taxes

Transferring assets to an irrevocable dynasty trust can constitute a completed gift for federal gift tax purposes. Depending on the value of the transfer and available exemptions, the grantor may need to file a federal gift tax return and could potentially owe gift tax.

When properly structured, assets transferred out of the grantor’s taxable estate may not be subject to federal estate tax when the grantor dies. Keeping assets in trust rather than distributing them outright to each generation may also help prevent those assets from becoming part of beneficiaries’ taxable estates. However, the tax treatment depends on the specific powers and interests created by the trust.

Generation-Skipping Transfer Tax

The federal generation-skipping transfer (GST) tax is designed to apply to certain transfers to people two or more generations below the person making the transfer, such as transfers from a grandparent to a grandchild.

Dynasty trusts are frequently structured with the GST tax in mind. Allocating the grantor’s available GST exemption to qualifying transfers can potentially allow trust assets and future appreciation to benefit multiple generations without triggering GST tax on every generational transfer. But a dynasty trust is not automatically exempt from GST tax. Certain distributions or trust terminations can be taxable when an exemption does not apply or has not been properly allocated.

Income Taxes

A dynasty trust can also owe income tax on income generated by assets it holds. Who ultimately reports and pays that tax depends partly on the trust’s structure and whether income is retained or distributed.

For federal tax purposes, a grantor trust generally attributes taxable income to the grantor. With a nongrantor trust, the trust may pay tax on income it retains, while beneficiaries may generally report taxable income distributed to them, subject to trust tax rules. The trustee may use Form 1041 and Schedule K-1 to report applicable trust income and beneficiary distributions.

Because estate, gift, GST and income-tax rules can interact, the tax consequences of a dynasty trust depend heavily on its design and administration.

Who Is a Qualified Perpetual Trust Right For?

Perpetual trusts are often favored by individuals who have larger estates and want to create a legacy of wealth that will stretch into future generations. You can use a dynasty trust to secure the financial future of not only your children but your grandchildren and great-grandchildren. And again, you can have control over how future generations are able to benefit from the trust.

One sticking point is the irrevocable nature of these trusts. If you think there’s even the slightest chance that you might change your mind later or that might need to take a completely different approach to estate planning, a perpetual trust may not be the best option. You may be better off with a revocable living trust instead, as they can offer greater flexibility.

Here’s one more thing to keep in mind: not all states allow qualified perpetual trusts. Certain states see dynasty trusts as problematic, as they go against the rule of perpetuities. This is an old common-law rule that aims to keep a small group of people from exercising a financial interest in certain assets indefinitely. If you’re unsure about the legal rules for qualified perpetual trusts in your state, you may want to connect with an estate planning attorney to discuss the details.

Bottom Line

A man determining whether a qualified perpetual trust is suitable for his estate planning needs.

A qualified perpetual trust can help you to create a financial dynasty for your children and children’s children for years to come. Whether this type of trust is best can depend on the specifics of your estate and financial situation. The good news is that there are a wide variety of trust options you can choose from to create a comprehensive estate plan.

Estate Planning Tips

Consider talking to your financial advisor about whether a perpetual trust is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Trusts are just one element to consider including in an estate plan. Creating your plan starts with drafting a last will and testament outlining how you’d like your assets to be distributed. You can make a simple will online using will-making software. In addition to a will, you may also consider an advance health care directive, power of attorney and life insurance to cover all of your financial bases.