A dynasty trust is an irrevocable trust designed to hold assets for the benefit of successive generations without incurring federal estate or generation-skipping transfer tax at each death, made possible in US states that have abolished or extended the rule against perpetuities.
In plain terms
Ordinarily, wealth is taxed each time it passes down a generation. A dynasty trust removes the asset from that cycle. The family funds the trust once, uses up exemption once, and from then on the trust — not any individual — owns the property. Children and grandchildren can live off it, borrow from it, and be housed by it, but they never legally own it, so it never appears in anyone’s taxable estate. In a state that permits perpetual trusts, this can in principle continue forever.
How it works
The mechanism has two halves, one federal and one state.
The federal half is the generation-skipping transfer tax, which exists precisely to stop this. Congress added it so that skipping a generation would not skip a layer of tax. But it comes with an exemption, and under 26 U.S.C. § 2631 that exemption equals the basic exclusion amount — $15,000,000 per person in 2026, per the IRS. Allocate exemption to a trust at funding and the trust becomes permanently GST-exempt. Everything it later earns compounds outside the transfer tax system regardless of how large it grows.
The state half is duration. English common law’s rule against perpetuities voided any interest that did not vest within lives in being plus 21 years — roughly a century, which capped how long a trust could run. Beginning with South Dakota in 1983 (SDCL § 43-5-8), states began repealing or extending it to attract trust business. Nevada set a 365-year limit under NRS 111.1031; Wyoming permits 1,000 years for trusts holding property other than real estate. South Dakota, Delaware, and Alaska allow trusts of unlimited duration.
That competition is why so much American trust money sits in states where almost none of the beneficiaries live. The trustee is local; the family is not.
The numbers
- GST exemption, 2026: $15,000,000 per person, $30,000,000 per married couple.
- GST tax rate above the exemption: 40%, tied by 26 U.S.C. § 2641 to the top estate tax rate.
- Nevada maximum trust duration: 365 years. Wyoming: 1,000 years. South Dakota, Delaware, Alaska: unlimited.
- Common-law default where the rule survives: lives in being plus 21 years.
- Top federal income tax rate for an undistributed trust, 2026: 37%, reached at just $16,000 of taxable income (Rev. Proc. 2025-32).
- Jurisdiction: United States. The structure is a creature of state trust law layered on federal transfer tax.
What people get wrong
That perpetuity is the point. It isn’t — the binding constraint is the exemption, not the calendar. A dynasty trust shelters exactly what was exempt when it was funded, and not a dollar more; funding one with $60 million when $30 million of exemption is available leaves half the transfer inside the taxable system. The duration rules only determine how long the sheltered portion can keep compounding untouched.
The second misreading is that “no estate tax” means “no tax.” Undistributed trust income hits the top 37% federal rate at $16,000 — a threshold ordinary individuals reach at roughly forty times that income — which is why well-run dynasty trusts distribute aggressively rather than accumulate. And the practical failure mode is rarely fiscal. It is arithmetic: five generations of ordinary family growth turns one settlor’s trust into several hundred beneficiaries, each holding a discretionary interest too small to matter and a vote too small to change anything.
Related
Read more: Trusts: How Wealth Is Held, Protected, and Passed On · Generational Wealth: How Long Fortunes Actually Last · Inheritance: The Transfer of Wealth Between Generations
See also: Irrevocable trust · Generation-skipping transfer tax · Estate tax exemption · GRAT