Dynasty Trusts and Multi-Generational Wealth: Can You Actually Skip the Estate Tax for Your Grandchildren?
The short answer is: yes, with serious caveats. The longer answer involves the generation-skipping transfer tax, a federal exemption that may be cut in half by 2026, and some meaningful differences in how Rhode Island, Massachusetts, and Connecticut treat these trusts. Let’s work through all of it.
What You’ll Learn
- What a dynasty trust is and why it isn’t the same as simply leaving money to your grandchildren
- How the generation-skipping transfer tax works and why it exists in the first place
- What the current federal exemption is and what might change soon under pending federal legislation
- How Rhode Island, Massachusetts, and Connecticut differ on trust duration and state estate taxes, and why that matters more than most families expect
- What a dynasty trust looks like in practice, and what it can and cannot protect against
- How to decide whether this strategy makes sense for your family’s situation
What Is a Dynasty Trust, Exactly?
A dynasty trust is an irrevocable trust designed to hold assets across multiple generations, often for 100 years or more, without those assets being subject to estate tax at each generational transfer. In a traditional inheritance, your estate gets taxed when it passes to your children, and then their estates get taxed again when wealth passes to their children. A dynasty trust is designed to interrupt that cycle.
The trust owns the assets. Your children, grandchildren, and great-grandchildren can benefit from those assets over time through distributions for things like education, health, housing, or general support. But because the trust owns the property rather than the individual beneficiaries owning it outright, no estate tax is assessed when a beneficiary dies. The assets simply remain in trust and continue on.
Think of it this way: instead of handing your grandson a $1 million check he’ll include in his taxable estate someday, the trust holds that $1 million and writes him checks throughout his lifetime. He benefits. He just never “owns” it in a way that triggers estate taxation.
The Generation-Skipping Transfer Tax: The Catch You Need to Understand
Congress anticipated this strategy decades ago and responded with the generation-skipping transfer (GST) tax, enacted in its modern form in 1986. The GST tax applies specifically to transfers of wealth that skip a generation, meaning transfers to grandchildren, great-grandchildren, or anyone more than 37.5 years younger than the donor who isn’t a direct descendant of the donor’s child.
The GST tax rate is not gentle. It equals the highest federal estate tax rate, currently 40%. And it applies in addition to the gift or estate tax, not instead of it. Without careful planning, a large transfer to a dynasty trust could trigger both a 40% estate tax and a 40% GST tax simultaneously, leaving the trust with a fraction of what you intended to put in it.
The saving grace is the GST exemption. Like the federal estate tax exemption, donors have a lifetime GST exemption that can be applied to transfers into a dynasty trust. For 2026, that exemption increased to $15 million per individual, or $30 million for a couple. Assets transferred into the trust up to that amount are “GST-exempt,” meaning future distributions and transfers within the trust are entirely exempt from the GST tax, potentially forever.
One important note: the GST exemption is not portable between spouses. Each spouse must use it, or it is lost, which is different from the estate and gift tax exemption, and a common planning mistake.
How Rhode Island, Massachusetts, and Connecticut Handle Dynasty Trusts
Federal law sets the floor on this planning, but state law shapes it considerably. Here’s what matters in Rhode Island, Massachusetts, and Connecticut.
Rhode Island
Rhode Island is genuinely dynasty-trust-friendly. Rhode Island eliminated the rule against perpetuities for trusts held by a Rhode Island trustee, meaning a trust established here can, in theory, last forever. This makes Rhode Island an attractive situs for families throughout New England who want maximum duration. Rhode Island also has a state estate tax with an exemption of $1,838,056 in 2026, indexed for inflation, with a top rate of 16%. So assets inside a properly structured dynasty trust can avoid that levy as well. The exemption is not portable between spouses. Currently, a bill (RI H5783) is pending that would increase the exemption to $4,000,000 for deaths occurring on or after January 1, 2026, but the inflation-adjusted figure is currently in effect.
Massachusetts
Massachusetts is more complicated. The Commonwealth has historically had one of the lowest exemption thresholds in the country. The Massachusetts estate tax applies to estates over $2 million, is not indexed for inflation, and has a top rate of 16%, depending on the estate size. Like Rhode Island, the exemption is not portable between spouses. Massachusetts has been slow to modernize its rule against perpetuities, which traditionally limits the duration of trusts to a life in being plus 21 years. Certain trust structures can extend this, particularly if a non-Massachusetts trustee or situs is used, but families relying solely on Massachusetts trust law for dynasty planning may hit duration limits their Rhode Island counterparts won’t encounter. The Massachusetts estate tax alone gives high-net-worth families a strong reason to carefully consider the choice of trust situs.
Connecticut
Connecticut took a notable step toward estate tax relief in recent years, gradually increasing its estate tax exemption to align with the $15 million federal exemption. Connecticut levies estate tax at a flat rate of 12% on the portion exceeding that threshold, and the total Connecticut estate tax is capped at $15 million. The state also enacted a rule against perpetuities reform, allowing trusts to last up to 800 years under certain conditions. That’s not perpetual, but for most families, 800 years is functionally equivalent. Connecticut also imposes a gift tax, which is unusual among states, so lifetime funding of a dynasty trust in Connecticut requires attention to state-level gift tax exposure in addition to federal concerns.
The gap between these three states is striking and directly relevant to dynasty trusts. A Massachusetts resident with a $5 million estate has a significant state tax burden, while a Connecticut resident at the same wealth level has none. That’s a meaningful planning consideration when choosing trust situs as well.
What a Dynasty Trust Looks Like in Practice
A well-drafted dynasty trust for a New England family typically names an independent corporate trustee, or a combination of a family distribution committee and a corporate administrative trustee, to manage assets and make distribution decisions over time. The trust document spells out what distributions may be made for, how future generations become beneficiaries, and how the trustee should balance the interests of current beneficiaries with those of future beneficiaries.
The trust is funded during the grantor’s lifetime, either by direct gift up to the GST exemption amount or by a combination of gift and sale (an “installment sale to an intentionally defective grantor trust” if you want to see attorneys light up at a cocktail party). Life insurance is also a common funding vehicle, since the death benefit can pass into a dynasty trust free of income and estate tax when structured correctly.
What the trust cannot do is make you untouchable. Assets in a dynasty trust are generally protected from the beneficiaries’ creditors, which is a real benefit, but the trust must be structured carefully and must not retain any “strings” that would cause inclusion in your estate. If you retain control over who receives distributions, for example, the IRS will argue the trust assets belong in your estate anyway.
Could a Dynasty Trust Work for Your Family?
Dynasty trusts make the most sense for families with enough wealth to meaningfully fund the trust after accounting for the GST exemption limits, for whom multi-generational transfer is a genuine goal rather than a theoretical one. If your estate is under the current federal exemption, the marginal benefit of a dynasty trust’s complexity probably isn’t worth it. If you’re sitting on $10 million or more and want to think seriously about what happens three generations from now, this conversation is worth having.
The choice of state situs, the structure of the trustee arrangement, and the timing of funding are all decisions that require careful legal and tax analysis. But the core concept is accessible: instead of handing wealth directly to each generation and watching the estate tax take a cut every 20 to 30 years, you build a structure that lets the wealth compound and distribute across generations without that recurring levy.
That’s a meaningful difference. If you’re working with significant assets and multi-generational goals, it’s worth understanding your options.
Contact Sayer, Regan & Thayer for more information on this topic.
The information in this article is for general educational purposes and does not constitute legal advice. Estate planning law is fact-specific and changes frequently. Consult a qualified estate planning attorney about your individual situation.
Frequently Asked Questions
What is the generation-skipping transfer tax (GST tax)?
The generation-skipping transfer tax (GST tax) is a federal tax designed to prevent families from avoiding estate taxes by transferring wealth directly to grandchildren or later generations. In addition to federal gift and estate taxes, the GST tax may apply when assets are transferred to individuals who are more than one generation below the donor. However, the federal GST exemption can be used to shield qualifying transfers, allowing properly structured dynasty trusts to pass wealth across multiple generations without triggering additional transfer taxes.
Who should consider a dynasty trust?
A dynasty trust may be worth considering for individuals and families with substantial assets who want to preserve wealth for multiple generations. These trusts are often most beneficial for families concerned about federal or state estate taxes, asset protection, and long-term wealth management. While the strategy can provide significant tax and creditor-protection benefits, it also involves complexity and ongoing administration, making it most appropriate for those with significant wealth and multi-generational planning goals.
What is the difference between a dynasty trust and a regular revocable living trust?
A revocable living trust is primarily a probate-avoidance tool. You retain control over the assets during your lifetime, and at your death, the trust distributes the assets to your beneficiaries, usually your children, who then own the assets outright. A dynasty trust is irrevocable, typically funded during your lifetime using your GST and gift tax exemptions, and is designed to hold assets across multiple generations without triggering estate tax at each generational transfer. The loss of control is the trade-off for the multi-generational tax efficiency.
If I establish a dynasty trust in Rhode Island but live in Massachusetts, does that work?
It can, but it requires careful structuring. Choosing Rhode Island as the trust situs, using a Rhode Island corporate trustee, and ensuring the trust administration occurs in Rhode Island are all factors that can support a Rhode Island situs even if the grantor and beneficiaries live in Massachusetts. Your attorney and trustee need to work together to make sure the structure holds up under Massachusetts scrutiny, particularly for state income tax purposes on trust distributions.
What happens to the dynasty trust if the federal estate tax is repealed?
This comes up often, and the honest answer is that the trust doesn’t become useless. Even if the federal estate tax were repealed, dynasty trusts still provide creditor protection, a governance structure for family wealth, and state estate tax avoidance in states like Rhode Island and Massachusetts that have their own levies. There is also the real possibility that federal estate tax repeal would be paired with a carryover basis regime that creates capital gains tax issues on inherited assets, which a trust structure can help manage. Build trust for the long game, not just for the current law.
How much does it cost to establish and maintain a dynasty trust?
Drafting fees for a well-structured dynasty trust typically range from $5,000 to $15,000 or more, depending on complexity, the number of beneficiaries, and the level of customization required. Ongoing trustee fees, particularly for corporate trustees, generally range from 0.5% to 1% of trust assets annually. For families with $5 million or more in the trust, those costs are modest relative to the estate tax exposure they’re managing. For smaller amounts, the cost-benefit calculus gets tighter and is worth discussing directly with an attorney.