The dynasty trust’s ability to shield the trust’s assets from creditors—and even former family members—is another draw. In an era of rampant litigation, when nearly half of all marriages end in divorce, this becomes no small consideration.

Indeed, Herbert K. Daroff, a lawyer and financial planner in Boston, says that for most of his clients, asset protection is the most important issue. "For most of my clients, the basic premise is some variant of ‘I don’t want my daughter-in-law to get any of my money.’ Most of my clients are more or less control freaks, and the idea of controlling from the grave is even better than controlling while alive."

Scott Farber, a financial planner based in Boston, concurs: Asset protection, especially bearing on the risk of divorce, is a primary concern for his clients. Farber recalls one couple who created a dynasty trust solely because they did not trust their daughter-in-law. "When you tell a client that you can design a trust that shields their children, grandchildren, and great-grandchildren from creditors and spouses, that’s all many of them have to hear, and they say, ‘I want that.’" The value of dynasty trusts for this purpose is even more compelling, he says, because prenuptial agreements tend to lose their teeth in the eyes of a court once a couple has been married seven or 10 years.

Most estate planning techniques are designed to remove assets from a taxpayer’s estate. Dynasty trusts prevent the taxation of the assets in the estate of future generations as well. Unfortunately, Congress realized that large tax revenues were being lost by the Treasury, thanks to generation-skipping techniques such as the dynasty trusts, and in 1986 it enacted the Generation-Skipping Transfer Tax (GSTT) specifically to capture those lost dollars.

The GSTT is a tax separate from and incremental to the estate tax. The GSTT is assessed on any transfers (lifetime or testamentary) that skip a generation (i.e., grandparent to grandchild) at the maximum estate tax rate, currently 49 percent. There is some relief: Congress included a significant exemption to the tax. Each person has a GSTT exemption of $1 million, which means he or she can transfer (during life or at death) up to $1 million without any GSTT. In 2004, the estate tax and GSTT exemptions will increase to $1.5 million for testamentary (at death) transfers but are staying at $1 million for lifetime transfers.

"When you tell a client that you can design a trust that shields their children, grandchildren, and great-grandchildren from creditors and pouses, that’s all many of them have to hear, and they say, ‘I want that.’"

A successful dynasty trust will exploit the tax exemptions of its founder as much as possible. Yet this becomes a significant challenge when substantial wealth is involved because of the $1 million lifetime tax exemption for both gift/estate-tax and Generation-Skipping Transfer Tax purposes. For those seeking to shield greater sums in a dynasty trust, two popular techniques exist to help maximize tax savings.

The first is an irrevocable life insurance trust (ILIT), which purchases life insurance on the individual establishing it. That person will gift cash to the trust equal to the insurance premium payment. The trust then makes the premium payments and collects the death benefit free of the estate tax and the GSTT. The benefit comes from the fact that the founder is taxed on the premium amounts paid into the trust, and not on the death benefit. By making the ILIT a dynasty trust, the tax savings are further enhanced because the death benefits are not taxed in the children’s or grandchildren’s estate.

"It’s all done in and around the issue of leverage," explains Malcolm Sklar, area president for GBS, an insurance and financial services company. He points to the fact that in 2003, a 65-year-old man can purchase a $3.33 million guaranteed death benefit for $1.1 million. "Imagine the rate of return on that. You can build up family wealth incredibly." Though, he concedes, to do that beneficiaries must give up access to the principal—a concession not all will be willing to make.

A second popular technique is to sell a family business or limited partnership into a dynasty trust, typically at a 30 percent to 40 percent discount to the fair market price because it has no control over the company’s affairs. In return, the dynasty trust gives the grantor a promissory note that it pays off using the income generated by the business. This approach has an added advantage: You have created what is known as a "defective" trust, which means you are responsible for the trust’s income tax during your lifetime. This allows the trust to grow at an even faster rate.

Fees to set up and manage dynasty trusts vary. Stephen Heyl, vice president at McDonald Financial Group, a part of the Key Financial Network, says that managers typically charge fees from 0.5 percent to 1.25 percent of assets under management, depending on how much is managed, with a yearly minimum of $3,000 to $7,000.

Aside from fees, those considering dynasty trusts must weigh whether they are willing to undertake the complex task of setting one up—a challenge even attorneys and professional wealth advisers find daunting. Jonathan Koslow, the head of the trust and estate group at Skadden, Arps, Slate, Meagher & Flom, says, "The problem is often that the client doesn’t understand, the accountant doesn’t understand, and many estate lawyers don’t understand."

Koslow describes the "glaze-over point," when even clients who are willing to discuss the minutia of the legal documents reach their personal threshold. "They’ll give you their thoughts and say, ‘Now you draft it.’ But there are so many subchoices, you can’t do it without them. It’s rare to find clients who will roll up their sleeves. There are so many opportunities and nuances, and there’s only so much a client can deal with."

This ordeal is multiplied by the need to create a flexible trust that can stand the test of time. "A lot of flexibility can be built into the trust. It doesn’t have to be rigid," Aucutt explains. "Each successive generation can be given power to make adjustments for future generations…. The trustee needs to be able to gather the general values and objectives of the person who set up the trust, but have flexibility. That is an enormous challenge."
"Flexibility, flexibility, flexibility," intones Bruce Stone, a partner at Coral Gables, Fla.-based Goldman, Felcoski & Stone, who authored legislation adopted by the state legislature to extend the life of dynasty trusts within Florida to 360 years. "You better build in flexibility. Can you imagine if you were trying to administer a trust set up by George Washington or set up in Norman England?" Even something as seemingly straightforward as an educational trust could pose problems down the line, notes Heyl. "What classifies as an education worthy of disbursement? Does a community college count? A technical school? A license for massage therapy? What if in 100 years most people are going to trade schools?"

Good intentions and flexible wording do not eliminate the risk—the likelihood, really—that somewhere down the line the trust will have to be changed or dissolved. So flexible wording should include a mechanism to amend the trust in the future, to liquidate the trust if it is in the best interests of the beneficiaries, to remove or replace a trustee, and to switch jurisdictions should, say, state tax laws change. "Does anyone seriously believe that many of these trusts will be around in 360 years or 1,000 years?" Stone asks. "The real idea is to put the assets into trust for as long as the family wants it in trust."

"Does anyone seriously believe that many of these trusts will be around in 360 years or 1,000 years?" Stone asks. "The real idea is to put the assets into trust for as long as the family wants it in trust."

James Kronenberg, principal and associate fiduciary counsel at Bessemer Trust, does not see ongoing or immutable trusts as realistic. "The idea that these things can go on forever is oversold. Things change. When you get to the third and fourth generation, the amount of money gets diluted because there are more people sharing the pie, and those people are of varying circumstances and have different needs and wants. That puts enormous pressure on the trust and the trustee to satisfy the beneficiaries." A well-designed, flexible trust can help.

In fact, Florida has enshrined flexibility of design in its laws by requiring trusts be amendable. If a trust cannot be modified, Stone says, "Any beneficiary can appeal to the court, and the court has the ability to modify that trust to better serve the beneficiaries." He adds: "If you are so foolish and vain to think you can write a trust now for 1,000 years, then go to Delaware."

Many do just that—and not simply because Delaware has waived the rule against perpetuities, thereby extending the life of a dynasty trust indefinitely. Delaware’s accumulated capital gains are not subject to state taxes, and the state offers individuals a high degree of privacy. Delaware also is at the forefront of asset protection, and its laws make it difficult for creditors to pursue a trust’s beneficiaries.

Not all states are so trust-friendly. For instance, courts in Massachusetts, ccording to Farber, have begun to count dynasty trusts as part of the overall estate—even if the trust’s assets cannot be touched. If a couple has $1 million in non-trust assets and $2 million in trust, the courts might consider the estate to be worth $3 million. If both are due $1.5 million, but by law the judge cannot touch the trust, the court might give the entire $1 million in non-trust assets to the spouse who is not the trust beneficiary.

Family issues must also be carefully considered when structuring a dynasty trust. Wachovia’s Jozik cautions clients to consider the risks of discord. The psychological and family considerations involved in setting up a dynasty trust must be weighed carefully. She says she is careful to probe and learn the family dynamics, asking questions that help to clarify what the consequences of their decisions might be for the family: Will children feel hurt, believing their parents do not trust them with the money? How might beneficiaries react if in the future a trust manager makes disbursements to one beneficiary and not another? Will the trust specify how to treat the children of first and second marriages, or will it leave this to the judgment of the trustee? Will beneficiaries become too dependent on the trust?

If these issues can be resolved, other challenges await. Stone finds one of the most difficult aspects of establishing very long-term trusts centers on the choice of trustee. When a bank is chosen to administer a dynasty trust, the grantor has tied the fortunes of the family to that bank for a potentially long time—but not necessarily forever. Financial institutions come and go; the trust agreement should specify how, if the trustee bank is eventually acquired or goes out of business, a new trustee should be chosen. If not, a court will have to decide the matter. This is another area of potential conflict. Also, there must be adequate checks and balances and a process for removing the trustee if necessary. "Having a trustee answerable to no one," Stone advises, "is a very foolish way to go."

If a family determines that a dynasty trust—structured with enough flexibility to serve the needs of succeeding generations—will assist in achieving its long-term, multigenerational goals, then it can serve as an effective wealth management tool. But flexibility is crucial: Changing a trust is an expensive process that can drain resources. Heyl recently interviewed to take over the management of a billion-dollar trust. "It was a lengthy interview process," he says. "There was so much money involved, it almost seemed like litigation. It was not a cheap process. You could see the attorney hours rack up."

Photography by Eric Tucker