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Published on: 02/09/2024 • 6 min read

The Difference Between a Legacy Trust vs. a Dynasty Trust

Navigating the complexities of wealth preservation and estate planning can often seem daunting for high-net-worth families. The key question that arises is: how can one work to ensure that their wealth is protected and efficiently passed on to future generations while minimizing exposure to taxes and creditors?

Trusts offer a powerful solution to this problem, and two popular options are a legacy trust vs. a dynasty trust. While these two may seem different at first glance, there are different names for the same type of trust. So the question that remains is, is a dynasty trust a good idea for my family?

The estate planning professionals from Avidian Wealth Solutions are here to discuss everything you need to know about legacy trusts, including the difference between a legacy trust vs. a dynasty trust, who needs a trust, and the possible advantages and disadvantages of establishing one. 

The difference between a legacy trust vs. a dynasty trust

A legacy trust is a type of irrevocable trust that is meant to protect your wealth for generations to come, and a dynasty trust is too — in fact, they are the same thing. 

Although legacy trusts are sometimes called dynasty trusts, and dynasty trusts are sometimes called legacy trusts, they both refer to a similar type of trust that can help you pass wealth down and potentially minimize state, estate, and transfer taxes.

As such, we will be using both names interchangeably throughout the remainder of this article to refer to the same type of irrevocable trust.

How does a legacy trust work?

A legacy trust is a third-party irrevocable trust that allows you to protect a large portion of your estate by essentially creating a second, sheltered estate. You take assets from your estate and place them into the trust, keeping them protected from creditors, taxation, and meddling from family members. 

You fund the trust through annual gifts and appoint a trustee who can use the funds in the trust to do things like pay for education, provide basic income for heirs, or take care of expenses related to unforeseen emergencies. 

These powerful trusts can last a long time, and can also result in the creation of news trust to provide multigenerational wealth preservations, which is why anyone setting up a trust to protect assets or looking at transferring ownership of property from parent to child should ask their estate planners if a legacy trust is right for them.

Continue reading: What assets can go in a trust?

Who needs a legacy trust?

For several different reasons, legacy trusts can be invaluable tools for people with large estates, large families, or large ambitions. Here are a few types of people who often benefit from legacy trusts and why: 

  1. High-net-worth individuals. Legacy trusts are an incredibly powerful tool for people who want to lower the total value of their taxable estate as well as those who want to plan for their wealth to remain in the family for long after they are gone. 
  2. Those with complex family dynamics. If your beneficiaries aren’t as financially responsible as you would like or you have dependents who have special needs, legacy trusts allow you to stipulate specific conditions for asset distribution and give you significant control over where that money goes. 
  3. People interested in philanthropy. If you are interested in supporting multiple charitable causes and organizations, legacy trusts may be able to offer you a structured, tax-advantaged way to do so. 

While a large estate, complex family dynamic, and a desire for an enduring legacy are all reasons why a legacy trust might be right for you. Talk to a trusted financial advisor about forming a legacy trust, and the effects it might have on any other estate planning solutions you’re already employing. 

Continue reading: Who needs a trust instead of a will

Legacy trust pros and cons

While legacy trusts offer a range of potential benefits for your estate, they are also incredibly complex both legally and financially, and there are many considerations to weigh while deciding if one might align with your financial goals and circumstances. 

Some advantages of a legacy trust include:

  1. Asset protection: One of the primary advantages of a legacy trust is asset protection. Once assets are transferred into the trust, they are shielded from potential creditors and legal claims against the grantor. 
  2. Tax benefits: Legacy trusts can be a powerful component of strategic estate tax planning. By removing assets from the grantor’s estate, the overall taxable estate is reduced, and therefore so are estate tax liabilities.
  3. Privacy: Assets held in a legacy trust generally bypass the probate process, leading to more efficient distribution of assets and a private estate remaining private. 
  4. Control over distribution: Legacy trusts allow grantors to maintain control over the distribution of their assets even after they are no longer the legal owners.

What are the disadvantages of a legacy trust?

There are two big legacy or dynasty trust problems you’ll want to heavily consider:

  1. Cost and complexity: The legal and financial complexity of setting up a legacy trust may simply make it an impractical option, especially for those with smaller estates. 
  2. Lack of flexibility and control: The irrevocable nature of legacy trusts is a true double-edged sword. While it provides asset protection and tax benefits, it also means that once assets are transferred into the trust, the grantor cannot reclaim or modify them. 

Although legacy trusts are irrevocable, this does not necessarily mean that they are inflexible. You can draft very specific language that attempts to accommodate changes in circumstance. While this specificity is a great tool, it underscores the fact that it should only be done with the help of talented and trusted financial and legal professionals at your side —  and with a reliable trustee appointed to the trust, who can help ensure that the trust is administered correctly and that your wishes for the trust are honored. 

Interested in setting up a legacy trust for your loved ones? Avidian can help.

While there is no difference between a legacy trust vs. a dynasty trust, this powerful estate planning solution should be considered by anyone interested in setting up a powerful trust to preserve wealth for generations to come.

Establishing a legacy trust requires careful planning and extensive knowledge of the financial and legal implications it may have on your estate, as well as monitoring and adjustment in perpetuity.

If you are interested in setting up a legacy trust, Avidian Wealth Solutions offers high-net-worth estate planning in Houston, Austin, Sugar Land, and The Woodlands. If you’re ready to take the next step in building your legacy, schedule a conversation with one of our advisors today!

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