What is multi-generational estate planning? How can I ensure that the wealth I leave behind is protected for my children and grandchildren? What is a Dynasty Trust? How can a California Dynasty Trust protect my heirs and descendants in California? Dynasty Trusts for high net worth families.
By James L. Cunningham Jr., Esq.
You’ve worked your entire life to build a financial legacy for your family. How can you be sure that the next generation will protect that legacy and use it wisely?
If you’re even reading about this topic, chances are pretty good that you’re financially astute. It also probably means that you have some idea about the usual fate of “multi-generational wealth.”
To put it gently, subsequent generations are unlikely to approach their inheritances with your degree of savvy. It could be different in your case, but (scary statistic time) 70% of inheritances are lost by the second generation—and a whopping 90% are gone by the third generation.
In short, the next generation usually fumbles the ball.
So, what can you do to protect the inheritance you leave behind?
In this article, I want to talk a little about changing your mindset to think beyond your own wealth to “multi-generational wealth.” That means thinking well into the future, past even your grandchildren. It means learning lots more about some of the topics we explore in our popular blogs and our in-depth webinars—and it means assembling a team of professionals to guide your family over time.
It’s a big topic, but here I’ll focus on one powerful tool employed by wealthy families planning for the future. It has the rather dramatic name of “Dynasty Trust.”
Before I go on, I need to mention that here at CunninghamLegal, it’s our job to guide savvy, caring families in the protection and transfer of multigenerational wealth through estate, trust, and tax planning at the most advanced levels—up to and including the creation of a Family Office. Contact us to learn more.
Many Estate Planning Attorneys simply don’t think in terms of multi-generational planning. They focus on avoiding probate in the next generation using a Living Trust—certainly a crucial topic—but in this article I want you to start thinking beyond simple Living Trusts.
Lawyers also somehow assume that people with significant assets already understand all about complex trusts, educating their children financially, and the legal issues around multi-generational wealth. They often don’t want to embarrass their clients by offering to educate them.
I think that’s a tragic shame. People who make a lot of money often have no idea how to hold onto it for the next generation. Like any other skill, it needs to be taught.
Planning for multi-generational wealth requires a basic shift in mindset
In most cases, our clients don’t come from wealthy backgrounds. They’re people who put their noses to the grindstone to build a better life for themselves and their families.
When you’ve worked hard all your life, it’s easy to fall into the belief that what you’ve earned belongs to you and you alone.
This can lead to, forgive me, a “hoarding” mindset.
Now, hoarding sounds like a negative word, but it usually comes from a good place. It’s not wrong to want to save for the future and protect your old age; in fact, that’s a responsible thing to do.
But you really can’t take it with you.
We all sort of know this, but shockingly few of us know it deeply and plan accordingly. Indeed, around 55% of people die “intestate,” without even a Last Will in place.
When you die, your money is going to go somewhere. I urge you to use it to help plan for the generations of your family to come. Maybe they could pursue their passions instead of focusing on a basic livelihood. With a leg up, maybe they could scale remarkable heights.
Here in America, we have a strange focus on “making it on your own.” In most other parts of the world, thinking ahead for family wealth, even to the level of “dynastic wealth,” seems to come naturally.
And by the way, I’m not just talking to wealthy people here. If you are only hoping to leave $20,000 to the next generation, good planning for that legacy could be just as important to your family as someone leaving $20 million.
Usually, only people who come from wealth do proper planning
Most self-made people have loved ones or important issues that they’d like to support even after they’re gone, but because they don’t come from wealthy families with professional advisors, a tradition of passing on wealth, and a method of offering significant support to causes, they don’t really know how to do those things right–or even have the mindset to explore the proper pathways.
Indeed, in my experience, it often takes several generations of wealth for people to develop a genuine mindset around “multi-generational” wealth. It’s sad, it doesn’t have to be that way, but it’s often true.
As a result, self-made people often leave behind a valuable mess that must be sorted out in court. You see it all the time, right? All those celebrities who made a bundle and then died without a plan?
I don’t want you to make that same mistake. And I want you to get past the basics of the standard Estate Plan with a Living Trust.
What are the dangers that threaten multi-generational wealth?
Why is it so easy for generational wealth to be lost? Let me list a few of the common enemies that can rapidly destroy the most beautiful of nest eggs. Each of these is a complex topic on its own, and I include links for more detail and protective strategies before I dive into my main subject.
I don’t want to scare you…well, maybe I want to scare you a little. I just want you to understand why the next generation usually loses out. I also want you to understand that except for the basic Estate Planning in number 1 below, a basic Living Trust will do little or nothing to prevent these other generational disasters.
- Lack of a well-structured Estate Plan with a basic Living Trust, forcing the estate into probate court, where assets are lost to lawyers, family disputes, court fees, and unscrupulous predators.
- Death Taxes, including both Estate Taxes and Inheritance Taxes, where the government takes a huge chunk out of a large estate that has not been properly protected and planned by experts.
- Property Taxes, especially in California, when real estate ownership has not been properly structured for the future. Due to Prop 19 changes, Prop 13 no longer automatically protects most inherited properties from reassessment, leading to enormous leaps in taxation.
- Irresponsible heirs, who either blow their inheritances rapidly or fail to protect the funds from taxes, creditors, and the like. A large inheritance can easily divert the life path of a child in the wrong direction.
- Irresponsible spouses of your heir who see an inheritance as a windfall, and blow the money despite the best efforts of your child. See asset protection.
- Divorce divides estates and eats up assets with legal fees, disputes, and bad decisions. Indeed, a large inheritance often triggers a divorce because it financially enables a divorce.
- Predatory ex-spouses and other complex, blended-family situations that cause unintended allocations of assets and trigger lawsuits. See asset protection.
- Predatory lawsuits. I’m sorry to say that if your heirs come into money, others will quickly find out, and there are lots of unsavory people and unethical lawyers ready to go after that money. Maybe your kid caused a car accident years ago, and the other driver suddenly discovers an injury they never noticed before. Maybe an employee suddenly remembers a long-simmering grievance. See asset protection.
- Creditors. If your heir is in financial difficulty or even bankruptcy, their inheritance may well be attacked and taken by creditors. See asset protection.
Well, the list could go on. These are just the most common threats to multi-generational wealth. And again, except for the vital avoidance of probate, a basic Estate Plan will do little or nothing to guard against such threats.
Dynasty trusts & the crucial difference between ownership and control
How can you protect your legacy for yourself, your kids, their kids, and beyond—from such disasters?
Beyond a Living Trust, people with significant assets should explore the other, more complex options that wealthy families have employed for generations to protect their wealth. These include Dynasty Trusts that can move from generation to generation, Charitable Trusts to reduce and defer taxes while passing on wealth to heirs, Inheritance Protection Trusts (see below), IRA or SRT trusts for significant retirement funds, and Family LLCs, especially for real estate holdings—among other vehicles.
All such strategies ultimately leverage the important legal difference between ownership and control, which wealthy families must learn if they are to make the right legal decisions in concert with their professional advisors.
Wealthy families use lawyers to create trusts and LLCs because those entities offer control of assets, and the benefits of those assets, without direct ownership. The trusts and LLCs own the assets, not the individuals. That makes it much, much harder for the IRS, ex-spouses, irresponsible heirs, creditors, and predatory lawsuits to take or destroy those assets over time.
Trustees, often professionals following the rules in the Trust, are the only people able to access the funds—which is a good thing, because “whatever you can get to, your creditors can get to.”
What is a Dynasty Trust and how can it help me protect my heirs?
For the remainder of this article, I’m going to focus on just one of these strategies to divide ownership from control–the Dynasty Trust. This is a financial vehicle that for some reason only the very wealthy have learned to use, but is actually available to anyone.
So, how does a Dynasty Trust work?
For an easy Dynasty Trust example, think of the Trust as a locked treasure box that is passed from generation to generation. In some states, it can move forward in perpetuity. You work with a lawyer to create a Dynasty Trust, and you will move significant assets into the Dynasty Trust while you are alive or following your death. This may include cash accounts, investment accounts, ownership shares in a business, real estate, and more. As of 2024, you as an individual can put up to $13.61M into a dynasty trust without incurring a gift tax—assuming you have made no other gifts that require the filing of a gift tax return during your lifetime. A couple can put in twice these amounts.
From then on, the Dynasty Trust always owns the assets, not any individuals in any generation. During your lifetime you will maintain control through the Trustee, and the Beneficiaries (not you) will benefit from these trusts. If you are married there are other strategies available to provide for your spouse while you are living.
A Dynasty Trust created with experienced financial professionals gives you a greater amount of control over the assets that you’ve accumulated throughout your lifetime. You can choose the trust’s parameters exactly as you want them.
The Trustee controls the key to the Dynasty Trust treasure chest
Let’s drill down on the controls over a Dynasty Trust.
In each generation, the assets will (hopefully) grow, but the key to the treasure chest is always held by a responsible Trustee who has the right to manage the Trust’s investments and dispense funds within that Trust to named Beneficiaries. Anyone can be appointed Trustee, but in general, families choose a bank or financial institution to be Trustee of the Dynasty Trust—that both increases the chance that the Trust’s rules will be strictly followed, and greatly helps ensure continuity in its administration.
Does a Dynasty Trust file its own tax return?
Yes. Once created, the Dynasty Trust is its own taxpayer and files its own tax returns each year.
Can I set the rules in my Dynasty Trust for future generations?
In general, yes. When you create a Dynasty Trust, you establish specific rules for the current and future Trustees, along with oversight by people like Trust Protectors, and other mechanisms that can last into perpetuity. Everything passes to the next generation and is designed to avoid Probate Court or passing through other mechanisms like Wills.
Are the assets in a Dynasty Trust protected from creditors, irresponsible heirs, and ex-spouses?
If a Beneficiary of the Dynasty Trust is sued by a creditor or an ex-spouse, or they are driven into bankruptcy by tax penalties or whatever–the assets in the Trust are designed to be protected because they will not actually be owned by the beneficiary. (But alas, nothing in life is guaranteed, and “super creditors” such as the Federal Government, and State Governments can sometimes force trust funds to be paid to taxing authorities and to pay child and spousal support.)
The assets in the Dynasty Trust are protected from irresponsible heirs and irresponsible spouses, because only the current Trustee can disburse money from the Trust, according to the Trust’s predetermined rules.
It’s also possible to customize the circumstances of the inheritance for each individual recipient. For example, you may instruct the Trust to vest power or management of a portion of your inheritance to a grandchild upon their completion of higher education.
As we shall see, the tax benefits can also be significant. Let’s learn a bit more about how a Dynasty Trust works while remembering that everyone’s situation is different, and you really need an experienced estate and trust attorney in California to create a Dynasty Trust customized for you.
Is a Dynasty Trust irrevocable?
Yes, a Dynasty Trust is irrevocable and is therefore very different than a revocable Living Trust. Once a Dynasty Trust is established and assets are transferred into it, it generally cannot be changed–except in a limited way, by a court or a Trust Protector who can, for example, replace an irresponsible Trustee, or change out a Trustee who is threatened by a creditor.
A Dynasty Trust gives you less flexibility than a revocable trust, which can be changed fairly easily. In exchange, it offers significant generational asset protections.
Properly structured up front, the Dynasty Trust can benefit your family in ways that don’t require flexible changes to the Trust itself—meaning you need to work with a knowledgeable, specialized trust attorney from the very start of your planning. A poorly planned Dynasty Trust, even if legal, might actually complicate some of the issues that you’re hoping to clarify.
You should also seek out an attorney with a firm that itself plans for continuity into the future so that your family always has experienced advisors available. That’s why it’s generally a bad idea to work with a solo attorney on a Dynasty Trust.
Can a Dynasty Trust avoid taxes?
Done correctly, assets that are moved into a California Dynasty Trust can bypass Estate Taxes (aka Death Taxes), Gift Taxes, or Generation-Skipping Transfer Taxes (GSTT) (see below). But only if done properly.
The Dynasty Trust Estate Tax strategy is particularly important. California does not currently have an estate tax, but Californians are subject to the federal estate and/or inheritance taxes for descendants–which are changed frequently depending on the political winds. Many other states do have individual death taxes (estate and/or “inheritance taxes”) on top of the federal estate tax. These have a variety of thresholds and rates—one reason you need lawyers and planners in your own state.
For 2024, the federal estate tax is currently assessed on estates worth more than $13.61M (or more than $27.22M for a married couple). The $13.61M cap is believed to be going up in 2025 before it gets cut in half in 2026. Assets (including real estate) in an Estate are assessed at fair market value. Depending on property values, this could mean that an Estate that contains just two or three pieces of real estate could bump up against this tax.
Can a Dynasty Trust protect against changes in estate tax exemptions?
Importantly, the federal estate tax exemption is due to be reduced in 2026. Unless Congress passes legislation to increase it, the exempt amount will reduce to around $7M per person. If you shift a sizeable amount of your assets into an Irrevocable Dynasty Trust, you likely can take advantage of the larger exemption now—an important reason to look into a Dynasty Trust as soon as possible.
Once transferred, the assets belong to the Trust and not to the Estate, so when you die no estate taxes will be assessed on the assets held in the Trust, even though those assets may have grown.
Remember, however, that beneficiaries will likely have to pay tax when they receive disbursements from the Dynasty Trust. That might require some additional tax planning in concert with professionals.
What is the Generation Skipping Transfer Tax?
Many wealthy people mistakenly believe that they can help their children escape taxes and still aid future generations by gifting or leaving significant assets to grandchildren instead of children.
The government has thought of this trick too, and the method they’ve established to keep families from “skipping” a generation of estate tax is called the Generation-Skipping Transfer Tax, or GSTT, implemented in 1976. I won’t go into all the details, but if you try to leave money to a grandchild (someone at least 37.5 years younger than you), the GSTT applies and will impose an additional death tax on money that has already been taxed! It’s as if it had been given first to your child, then to your grandchild. The flat rate is a whopping 40%, and like the federal estate tax, it currently (2022) applies to assets over $12.06M per individual giver. If a person leaves $10M subject to GSTT in 2022, 40% of $10M is due ($4M) plus another 40% on the remaining $6M ($2.4M), for a total tax bill of $6.4M! That’s a 64% tax!
The GSTT is a major impediment to the transfer of generational wealth, but its effects can be lessened by careful allocations of gifts (in concert with a knowledgeable lawyer), and often by the use of a Dynasty Trust.
Can a Dynasty Trust protect against the GSTT?
Generally, yes, if the Trust is done correctly. With a proper Dynasty Trust, estate taxes only need to be paid once, when the Trust is funded. After that, the Trustee can use the money to help a grandchild directly without triggering the GSTT. This keeps money in the family that would have otherwise been transferred to the government.
Can a Dynasty Trust help me preserve my Prop 13 tax base?
In some cases, yes.
California’s Prop 13 protects property owners from the huge property tax increases that state governments love to pass. Under Prop 13, property taxes can increase by no more than 2% per year. But taxes can still shoot up when a property is reassessed, and the whole game in the Golden State is avoiding reassessment.
Reassessments are triggered by sales or transfers of property to others. The old Prop 58 used to protect children who inherited properties from those reassessments, but Prop 19 in 2020 cut the legs out from those protections, and it is now very difficult to avoid reassessment when a property is inherited. Among other limitations, including the property’s value, it’s only possible when an heir actually lives in the property.
It’s a complicated game, but a Dynasty Trust can help. Another important strategy is a Real Estate LLC, especially for investment properties. Using a Dynasty Trust with one or more LLCs, property may be able to avoid reassessment and as long as the Dynasty Trust with LLC combination remains intact, it may be able to avoid reassessment and death taxes!
This can be an especially beneficial tool if rental properties are placed within the Dynasty Trust. But again, you need an expert California estate attorney to structure this properly and explore the alternatives available through an LLC.
You can read more about preserving your Prop 13 tax caps here. CunninghamLegal can help with this vital, but often complex planning. Contact us for more information.
Can an existing Dynasty Trust later be broken into multiple family trusts?
Yes. This question often arises because of the way siblings separate from one another and want individual Trust management for their own families. A good trust lawyer can later break up (or, legally speaking “sever”) a properly-structured Dynasty Trust into multiple Dynasty Trusts.
Is there an alternative to the Dynasty Trust, funded only when I die?
Yes. At CunninghamLegal, we also prepare what we call Inheritance Protection Trusts which activate only when you die, and offer similar benefits as a Dynasty Trust. Essentially, when you pass, significant assets go into an irrevocable trust that has similar protections. I won’t go into the details here, but please enquire about this important option for your family.
Significantly, an Inheritance Protection Trust is designed, in part, to protect a loved one from losing half in divorce (but not your own divorce) so that your children’s inheritance is protected regardless of what later marital configurations arise.
How can I prepare my heirs to inherit a large estate?
Part of shifting your mindset toward creating meaningful multi-generational wealth is shifting the mindset of your children and grandchildren.
Again, it’s often the case that people who don’t come from wealthy families don’t know how to talk to their own families about wealth. But believe me when I say that if you want to establish a viable generational plan, you need to talk about these things, and often.
Money conversations are sometimes uncomfortable, but it’s better for you to begin preparing your family now, especially if they’re going to receive a large estate. Tell them what they’re likely to inherit and that you want to plan for the future together with them. Then put them in touch with financial advisors and other professionals that you trust. Meet with those professionals as a family.
People think that telling your children they will have a substantial inheritance or participate in a large Trust may screw up their lives—especially by de-motivating them from their careers. But being taken by surprise with that information can be worse, and you need to help them understand that people can be independently wealthy but still find self-fulfillment in their career life. It’s just that the focus changes from making money to other, often more important goals.
Self-pride will come from those goals: whether your kids become artists, teachers, entrepreneurs, or something else, the mindset of “long-term stewardship” and responsibility for others needs to be passed on.
I’ve personally witnessed the generational cycle of wealthy families many times. And my most important advice is simple: Don’t force your family to figure all this out after your death, especially if you are leaving a large estate. They’re already going to have plenty on their minds, and an influx of wealth brings its own complications and issues, maybe even a disaster.
The better-prepared your heirs are, the more likely your inheritance will last for multiple generations. And the less likely they will fumble the ball or have it stolen from them.
Is consulting with a lawyer enough, or do I need to consult with other professionals?
Multi-generational planning for significant wealth requires sophisticated techniques, and usually, more than one professional. Although speaking to an attorney at a law firm that offers a Dynasty Trust service is a good first step, you’re going to need more team members to ensure that everything runs smoothly.
You need to assemble what I like to call your A-Team: a specialized California Estate Lawyer, a CPA, and a Financial Advisor. These team members will work together to make sure that everything is optimized and running smoothly.
Estates worth over $10 million might benefit from the creation of a multi-Family Office. This is a service we offer here at Cunningham Legal that provides you with a legal and tax-planning team for a single annual fee. This team can assist your family with all sorts of planning questions and issues and work with your heirs over multiple generations.
The long game for family wealth
Interested in planning for the long game of multi-generational wealth with your family? Prepare yourself with educational tools like those we offer here. Assemble your team of advisors. Investigate vehicles like a Dynasty Trust, charitable trusts, IRA Inheritance Trusts, and more to pass on your wealth.
Most importantly: change your mindset and have the vital inheritance conversations with your family that will change their mindset too.
Oh, and you should read my best-selling book, Savvy Estate Planning, which covers many of these issues and more!
What Do We Do as California Estate Attorney Specialists?
The lawyers and staff at CunninghamLegal help people plan for some of the worst and best times in their lives; then we guide them when those times come. Our expert lawyers stand ready to serve you with professional divorce Estate Planning for California residents.
Make an appointment to meet and have a consultation with CunninghamLegal for California Estate Planning or Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956, schedule a free call, or contact one of our offices throughout California.
Please also consider joining one of our free online legal webinars.
We look forward to working with you!
Best, Jim
James L. Cunningham Jr., Esq.
Founder, CunninghamLegal
We guide savvy, caring families in the protection and transfer of multi-generational wealth.
