What Is a Qualified Perpetual Trust?

SmartAsset: What Is a Qualified Perpetual Trust?

Trusts can be a useful tool in estate planning when you want to leave specific instructions about how your assets should be managed during your lifetime and after you pass away. One type of trust, the qualified perpetual trust, can be used to pass assets down to your beneficiaries decade after decade. Also known as a dynasty trust, qualified perpetual trusts can offer greater control over assets than other types of trusts, though they aren’t necessarily right for everyone.

A financial advisor could help you put a financial plan together for your family’s needs and goals.

A qualified perpetual trust or simply, perpetual trust or dynasty trust, is a type of trust that’s designed to allow the grantor to pass assets on to beneficiaries in perpetuity. In theory, a dynasty trust could last 100 years or more since they don’t terminate until several years after the death of the last surviving beneficiary.

Like other types of trusts, perpetual trusts can be used to avoid probate for certain assets. Probate is the legal process in which someone’s assets are inventoried and liquidated to pay outstanding debts, with the remaining assets being distributed among the deceased person’s heirs either according to the terms of a will or state inheritance laws. Probate can be a time-consuming and expensive, not to mention a public, event which is why some people prefer to avoid it if possible.

What’s different about a qualified perpetual trust is how long the trust lasts. As mentioned, a perpetual or dynasty trust does not terminate until the last surviving named beneficiary to the trust has passed away. And even then, there’s a gap of several years between the beneficiary’s death and when the trust finally ends.

How Does a Qualified Perpetual Trust Work?

Here’s the short version of how a perpetual trust works: it’s designed to pass down assets to beneficiaries indefinitely. You set up the trust and transfer assets to it, then name one or more beneficiaries. You also name a trustee to oversee the assets in the trust and specify your wishes with regard to how those assets should be managed.

Once you pass away, the perpetual trust takes effect. The trustee will assume responsibility for distributing trust assets to named beneficiaries, according to the terms you set. You can be as specific as you like with your instructions to ensure that the trust assets will last as long as possible.

For example, say you have two adult children who are in their 40s. You could set a condition that they can only receive monthly interest payments from trust assets, not any of the principal, during their lifetime. You could extend that condition to their children if they have any. In doing so, you can preserve the trust principal and ensure that future generations are able to draw income from it.

You may also set other conditions on the distribution of assets. For example, you might only allow grandchildren to receive principal from the trust once they graduate from college or turn 25, whichever comes first. Or you may set limitations that prevent a beneficiary from withdrawing anything from the trust at all in certain circumstances.

Dynasty trusts are irrevocable, meaning that once you transfer assets to the trust, that transfer is permanent. That means if you have a change of heart about leaving certain assets in the trust, you’re generally unable to reverse the transfer. For that reason, it’s important to be clear about how a qualified perpetual trust might benefit you and what assets to include.

Benefits of a Qualified Perpetual Trust

Whether you call it a qualified perpetual trust, perpetual trust or dynasty trust, the advantages are the same. Here are some of the ways in which you might benefit from this type of trust:

Estate tax. Dynasty trusts can yield savings on estate taxes since assets are subject to the estate and gift tax at the time they’re transferred into the trust. That means those assets are not taxed again, relieving a tax burden for the subsequent generations that benefit from them.
Generation-skipping tax. It’s possible that you may decide to leave assets to your grandchildren, rather than to your children, skipping over one generation in favor of another. That strategy can backfire, however, if assets are subject to a generation-skipping tax. A perpetual trust can help to avoid that tax.
Income tax. Assets in a trust are still subject to income tax if they generate income. With a qualified perpetual trust, you can minimize this taxation by transferring assets that produce minimal or no income.
Greater control. One of the main reasons people consider dynasty trusts is the control factor. You can have a say in how your assets are managed for years to come, even after you’ve passed away. And you can be as specific as you like about when and how those assets can be distributed to your beneficiaries.

Who Is a Qualified Perpetual Trust Right For?

Perpetual trusts are often favored by individuals who have larger estates and want to create a legacy of wealth that will stretch into future generations. You can use a dynasty trust to secure the financial future of not only your children but your grandchildren and great-grandchildren. And again, you can have control over how future generations are able to benefit from the trust.

One sticking point is the irrevocable nature of these trusts. If you think there’s even the slightest chance that you might change your mind later or that might need to take a completely different approach to estate planning, a perpetual trust may not be the best option. You may be better off with a revocable living trust instead, as they can offer greater flexibility.

Here’s one more thing to keep in mind: not all states allow qualified perpetual trusts. Certain states see dynasty trusts as problematic, as they go against the rule of perpetuities. This is an old common-law rule that aims to keep a small group of people from exercising a financial interest in certain assets indefinitely. If you’re unsure about the legal rules for qualified perpetual trusts in your state, you may want to connect with an estate planning attorney to discuss the details.

Bottom Line

A qualified perpetual trust can help you to create a financial dynasty for your children and children’s children for years to come. Whether this type of trust is best can depend on the specifics of your estate and financial situation. The good news is that there are a wide variety of trust options you can choose from to create a comprehensive estate plan.

Estate Planning Tips

Consider talking to your financial advisor about whether a perpetual trust is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Trusts are just one element to consider including in an estate plan. Creating your plan starts with drafting a last will and testament outlining how you’d like your assets to be distributed. You can make a simple will online using will-making software. In addition to a will, you may also consider an advance health care directive, power of attorney and life insurance to cover all of your financial bases.