Dynasty Trust: The Bezos Clan and Other Ultra-Rich American Families

(Moneywise) - The Wrigley, Bezos and Pritzker families all use a “dynasty trust” to stash their wealth for future generations — and when it comes to the funds held in these arrangements, only have to pay tax once, according to a report from Business Insider.

Here’s more on how the rich keep their money in the family.

What is a dynasty trust?

Unless you’re a Rockefeller, you may not have heard of dynasty trusts before. But this complex legal relationship serves two very specific purposes, according to Cornell Law School’s Legal Information Institute: to “avoid taxes to the extent possible” and to set aside money for future generations.

Some states, like Florida and Wyoming, allow you to establish a trust for up to 1,000 years — or 40 generations. Delaware, meanwhile, allows for them to remain open indefinitely (though there are some restrictions on real estate held in a trust).

These trusts are useful when wealthy families want to avoid losing control of valuable assets like a family business or home. But one of their most attractive features is the ability to avoid estate taxes.

How to avoid estate taxes

Generally, when an asset passes hands, the tax agency expects a share — likely through a gift, estate or capital gains tax. Most families pass down wealth from generation to generation, which means their family money is taxed with every generation.

To avoid that erosion, some ultra-rich families choose to skip a generation in the wealth transfer, however that then triggers what’s known as a GST tax. The GST, or generation-skipping transfer, tax allows the government to prevent families from avoiding paying transfer taxes in perpetuity, according to California-based Bridge Law LLP.

But when families use a dynasty trust, they only have to pay the GST tax on the value of the assets being placed in trust. However, future generations that draw from the trust will only face income tax on that money.

How much money are rich families saving?

Financial services company The Northern Trust Institute did the math to make a rough estimate for a dynasty trust in Delaware.

Let’s say you put in $13.61 million to the trust. Most trusts would be subject to a generation-skipping tax after 25 years — at which point The Northern Trust Institute estimates your assets would have grown to be worth $46.08 million — but since dynasty trusts are exempt, you’ll save $18.43 million in taxes. After 75 years, your trust will have accumulated $528.5 million, thanks to a 5% rate of return and no taxes.

Northern Trust then points out how much you’d lose by not using a dynasty trust. That initial $13.61 million put in a non-dynasty trust would only be valued at $114.16 million after 75 years — over $400 million less than if you had to pay the transfer taxes.

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Sabina Wex is a writer and podcast producer in Toronto. Her work has appeared in Business Insider, Fast Company, CBC and more.

By Sabina Wex
February 28, 2024


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