§ 1.5 Estate Planning

Dynasty and Grandchildren's Trusts

A dynasty trust holds property for more than one generation under terms its creator sets. The appeal is obvious. The difficulties are less obvious, and they are mostly about how long a document has to stay sensible.

The idea is straightforward: rather than leaving property outright to a child, who then leaves what remains to a grandchild, the property is placed in a trust that serves each generation in turn. Because no beneficiary ever owns the assets, they generally stay outside each beneficiary's taxable estate, outside their divorce and outside their creditors' reach — and the transfer tax that would otherwise apply at each generational hand-off is not repeatedly incurred.

How long a trust may last in Texas

Every jurisdiction limits how far into the future a grantor may control property. The traditional rule against perpetuities is famously convoluted; the practical question is simply the outer limit. Texas modernised its answer in 2021: an interest in a trust may now vest under an alternative period of up to three hundred years from the date the trust becomes irrevocable, as an alternative to the classical common-law formulation that Texas retains alongside it.

Three hundred years is, for planning purposes, unlimited. It also raises a serious drafting question that is easy to skate past: a document written today has to remain workable through economic, legal and family circumstances nobody can foresee. Good multi-generational drafting therefore concentrates on flexibility — trust protector provisions, decanting powers, situs changes, and standards broad enough for a trustee to apply sensibly in a world the grantor cannot picture.

The generation-skipping transfer tax

Congress anticipated the strategy. The generation-skipping transfer tax exists to impose a levy on transfers that skip a generation, at the highest federal estate tax rate, so that property cannot pass indefinitely untaxed.

Each individual has a GST exemption, indexed annually, which can be allocated to transfers into a dynasty trust. Allocating it correctly renders the trust exempt — and, crucially, exempt permanently, including all future appreciation. This is why dynasty planning is conventionally done with assets expected to grow: the exemption is measured when allocated, not when the property is eventually distributed.

The exemption amount, and the estate tax exemption it tracks, are both scheduled to change and have changed repeatedly. Do not rely on any figure quoted in a general reference, including this one; the IRS estate and gift tax pages publish the current numbers. Allocation is made on a gift tax return and the rules on automatic allocation are technical enough that failing to file has ruined otherwise sound plans.

Grandchildren's trusts on a smaller scale

Most families using a trust for grandchildren are not doing transfer tax planning at all. They are doing something simpler and often more valuable: making sure a modest inheritance is not consumed at twenty-two.

These trusts typically set staged distributions — a portion at twenty-five, a portion at thirty, the remainder at thirty-five — or give a trustee discretion against stated standards such as health, education, maintenance and support. Education-focused variants pay tuition directly. Incentive provisions matching earned income exist and are worth thinking about carefully, since they can be read by their intended beneficiaries as a permanent statement of the grantor's opinion of them.

Where the only goal is education funding, a 529 plan is usually simpler, cheaper and better suited than a trust. Where the goal is broader protection or control, the trust earns its complexity.

The costs nobody mentions at the outset

A trust intended to last for generations must be administered for generations. That means a trustee in every one of those generations, annual accounting, annual tax returns and continuing custody arrangements. Individual trustees die, move, lose interest and occasionally fall out with the beneficiaries; corporate trustees charge fees that compound against the same principal the trust exists to preserve.

Trust income retained rather than distributed is taxed at compressed rates that reach the top federal bracket at a very low threshold, which pushes trustees toward distributing — in tension with the protective purpose. And the human cost is real: property held in trust for descendants who did not ask for it can become the organising grievance of a family. The best of these documents are drafted with that risk in view, and give trustees enough latitude to terminate a trust that has outlived its usefulness.

For most Texas households the honest recommendation is a modest, flexible trust with a clear termination point, rather than a three-hundred-year instrument. The irrevocable trusts page covers the general trade-off between control and protection, and the core documents page covers the plan that comes first regardless.