Dynasty Trusts
The Inner Workings
What makes a Dynasty Trust tick is the effect of the generation-skipping tax (GST) exemption and the liberalizing of the Rule Against Perpetuities. In Texas, the Rule Against Perpetuities is now 300 years—except for real estate, which is limited to around 100 years.
As for the length of the trust document, it doesn’t contain significantly more pages than other irrevocable trusts used for estate and gift tax planning.
As the name implies, the purpose of the Dynasty Trust is to create a trust that can last for centuries, if not forever. First-generation beneficiaries who are not skip persons can still be beneficiaries of Dynasty Trusts.
GST rules apply to gifts made to skip persons—natural persons who are two or more generations below the grantor. For our purposes, think of skip persons as grandchildren, great-grandchildren, and future generations.
2025 GST and Estate Tax Exemptions
For 2025, the gift and estate tax share a combined lifetime exemption of $13,990,000. The GST lifetime exemption is in the same amount but separate from the gift and estate exemption. The GST also allows for an annual exclusion equal to the gift tax exclusion.
GST-Exempt vs. Non-GST-Exempt Shares
Assume that a trust agreement provides for a non-GST-exempt share and a GST-exempt share. A sample provision could read:
To the extent distributions are made from trust principal, the Trustee shall first satisfy such distributions from the non-GST-exempt share until it is exhausted, and only thereafter from the GST-exempt share, unless the Trustee determines that such ordering would not be in the best interest of the beneficiaries.
The idea is to exhaust the non-GST-exempt share first. Once that share is depleted, distributions from the GST-exempt share can be made not only to children and other non-skip persons, but also to grandchildren and later generations (skip persons) without incurring the 40% GST tax.
Distribution Standards and the HEMS Provision
When it comes to distributions, best practice is to limit them to health, education, maintenance, and support (HEMS). Below is a provision from the Treasury Regulations that supports this approach:
During the lifetime of any beneficiary, the Trustee may, in the Trustee’s sole discretion, distribute to or for the benefit of such beneficiary as much of the net income and principal of the trust as the Trustee determines to be necessary for the beneficiary’s health, education (including college and graduate education), maintenance, or support (within the meaning of Treasury Reg. §20.2041-1(c)(2)).
Distributions may be made directly to the beneficiary, or for the payment of such expenses on behalf of the beneficiary.
If more liberal powers of appointment are included in a GST trust agreement, the IRS could argue that such distributions are part of a beneficiary’s estate—which may taint the generation-skipping protections of the Dynasty Trust.
Final Thoughts
This article is intended for those who want to understand the inner workings of a Dynasty Trust. These trusts are fraught with land mines—and a GST trust agreement is not something to be handled using a form document with fill-in-the-blank fields.
