The Use of Dynasty Trusts in Modern Asset Protection and Estate Planning

The development of the modern day trust stems from the early Middle Ages during the time of the Crusades.  The earliest English courts of “equity” (or fairness) held that assets could be alienated to benefit heirs or be set aside for a special purpose.  Soon thereafter, the King of England sought limitations on how long a trust could be in “effect.”   Since the King collected a tax from his nobility at the time of their death, the trust was a vehicle to circumvent those early “death taxes.”  Eventually, the common law developed in such a way that a trust could not be in effect longer than “a life in being plus 21 years.”

This is still the basic rule in most US states and is referred to as the “rule against perpetuities,” meaning that you must leave your assets to persons, charities, etc., and the disposition must be completed within 21 years after the measuring life (i.e. children, grandchildren, etc.).

Some States, as well as numerous financial centers or “tax havens,” have legislatively repudiated this basic common law concept.  Many select specific periods of years for which a trust can be in effect, most commonly 100 years.  In some cases the term is even longer, such as Nevada which now permits trusts for 365 years and South Dakota where trusts may be perpetual.

Any jurisdiction that legislatively allows for a specific period beyond the English common law “life in being plus 21 years,” whether for a term or perpetual, is referred to as a jurisdiction which permits “Dynasty” Trusts.  “Dynasty” trusts are designed to be in effect for longer than two generations.

In the case of extremely wealthy families, a “Dynasty” trust, is often married together with another vehicle referred to as a “Family Office.”  The purpose of those vehicles working together is to steward family wealth over many generations rather than simply pass on wealth from one generation to the next for consumption.

The “Dynasty” trust limits who can access trust assets, when and for how much.  Frequently, only the income of the trust may be accessed, while the overall corpus is left intact for future generations.  Sometimes, beneficiaries can only borrow funds which must be repaid or a beneficiary can only seek venture capital for which the trust receives “equity” in return. Through these types of limitations or safeguards, the family wealth is protected, preserved and allowed to grow, while each successive generation may only access the funds in a way that they are not diminished.

Domestic Verses Foreign Trusts

Most people structure their asset protection and estate planning affairs in their home country; however, more and more people are looking to international solutions for a variety of reasons.  Those reasons include:
  1. Global Diversification:  Many international banks, brokerage houses, hedge funds, mutual funds and even individual shares in foreign companies are closed to US investors.  A foreign trust is considered a “juridical person” whose nationality is determined by where the trust is established and registered.  The foreign trust can therefore open up financial doors to investments and financial accounts which are presently closed to US persons.
  2. Better Asset Protection:  While Tennessee, Alaska, Nevada, Delaware and South Dakota vie to have the most protective trust features in the US, legislation granting creditor protection as well as extending the trust term from traditional common law norms into the “Dynasty” arena are all fairly new.  Undoubtedly, these protection provisions will be challenged on the grounds of the “Full Faith & Credit” clause as well as the “Supremacy” clause of the US Constitution.  In many cases, these Constitutional clauses require a state to enforce the laws of other states or put the federal laws above the laws of the individual state.  These Constitutional concepts undermine the ability of any particular state with regard to enhancing asset protection beyond common norms accepted by the majority of states.  In the case of federal bankruptcy, for example, state asset protection will certainly give way to federal rules interpreted by federal (not state) judges. In the international or “offshore” arena, the “Full Faith and Credit” and / or “Supremacy” clauses do not apply as between foreign countries.  In fact, most asset protection jurisdictions specifically reject the notion that any judgment from another country is enforceable in its jurisdiction.  Therefore, the only way to go after assets in a foreign jurisdiction is to initiate litigation in that jurisdiction which is frequently very difficult, if not impossible to do.
  3. Better Confidentiality:  Frequently trusts registered in foreign jurisdictions are not subject to having the grantors’ or beneficiaries’ identities listed in any sort of public registry.  While most individuals still need to disclose the information to their own tax authorities, the ability of a potential plaintiff to determine what you own or to levy litigation against the asset is virtually eliminated.  The same confidentiality also applies to children, grandchildren and more remote heirs who have no right to know that they are a beneficiary of a trust until such time that the trust document permits disclosure to them.
  4. Global Hedging:  Not only does an international trust open doors closed to most Americans, it can also minimize risks associated with “having all of your proverbial eggs in one basket.”  International trusts allow for better global diversification in assets, investments and currencies.  They can also protect against political risk, regulatory and tax changes, as well as the risk of future capital and currency controls.  For many Americans this “hedging” is like buying an insurance policy you hope you never need.
  5. Tax Issues:  While most tax benefits of trusts have been eliminated, there are still a few things worth mentioning.  Both domestic and foreign trusts are capable of receiving up to $5,430,000 per person, gift and estate tax free.  That means $10,860,000 per couple can go into a foreign or domestic trust without a direct tax consequence.  In the case of a foreign “Dynasty” trust, once the US grantor / settlor dies, there is no immediate taxation of the foreign trust on its present earnings until a direct distribution to a US heir occurs.  The trust is also not part of any US tax payers’ estate, meaning that it is not subject to estate taxes.  To the extent that the trust goes on for many years and numerous generations, it can potentially avoid the effects of the estate tax at each successive generation and thereby keep more assets inside the trust for productive income generation. The “Dynasty trust” is a tool used by moderately wealthy to ultra-high net worth individuals who wish to limit any one beneficiary’s access to trust assets and thereby perpetuate wealth over many generations.  When used together with a family office structure, and other long term wealth preservation tools such as real estate, gold, timber, and insurance products, the “Dynasty” trust is perhaps the very best method of stewarding wealth beyond merely one or two generations.  International “Dynasty” trusts add the additional features of global access, global diversification and hedging of the economic, and political risks associated with maintaining all of one’s’ wealth in his or her home country.  For those reasons, an international asset protection “Dynasty” trust should be considered by anyone wanting to leave an inheritance to their children, children’s children and beyond.

Joel M. Nagel is an international lawyer and entrepreneur focusing his practice in the area of asset protection, cross-border transactions, and global investment. He speaks all over the world on the topics of asset protection, global banking and investment, and international legal compliance. Joel has written articles and has been quoted by Forbes, Fortune, Live and Invest Overseas, Hemispheres Publishing, Stansberry Research, Oxford Club, Pirate Investor, True Wealth, Islands magazine, Business Times, Physician’s Money Digest, and the Simon Letter. Joel can be reached at or +1-412-749-0500.

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