Q&A: Dynasty trusts

Q: My attorney suggested that I consider a "dynasty trust" to pass $2 million on to my heirs. What is a dynasty trust?

A: A dynasty trust allows you to set aside money for several future generations, rather than simply leaving everything to your spouse and children. A general rule with estate planning is that taxation applies upon the death of each person as assets pass to the next generation. The primary purpose of a dynasty trust is to avoid taxation upon the death of each generation so that the funds can continue to grow over 100 or more years and benefit many generations. Although there is a "generation-skipping tax" that applies if you leave a substantial amount of money to people two or more generations below you, proper structuring of a trust can allow several generations to benefit while limiting your children's access to prevent overconsumption.