How dynasty trusts hold assets across generations

Business ownership begins with funding

A trust holds only assets transferred to it. Naming a business in a family discussion does not transfer its ownership to the trust.

In Minnesota, for example, trustees may acquire property and continue or create a business involving the trust's business interest, subject to the trust terms and fiduciary duties. Other states differ.

For a Minnesota LLC, a transferee receives the transferred distribution rights. Subject to the charging order statute, transfer alone does not confer management rights or access to company information.

During dissolution and winding up, the transferee is entitled to an account of company transactions only from dissolution onward. The company need not recognize the transferee's rights before receiving notice of the transfer.

A transfer violating an operating agreement restriction is ineffective against a person who knew of that restriction when the transfer occurred.

For the planning conversation, gather the ownership records, operating agreement and proposed transfer documents together. Ask counsel to distinguish the economic interest from the authority to make business decisions.

Delaware distinguishes land from entity interests

Delaware's trust duration provisions distinguish directly held real property from personal property. The following discussion concerns trusts not created through the exercise of appointment powers, which require separate analysis under the statutory qualifications.

Under section 503, trust interests in real property are not invalidated by the common law perpetuities rule or the common law limit on noncharitable purpose trust duration.

Trust interests in personal property are not invalidated by those rules or other perpetuities rules. Covered real property still held in trust must nevertheless be distributed after 110 years.

That period begins at the later of the property's acquisition by the trust or the trust becoming irrevocable. Distribution follows the instrument's provisions for distributing that property upon termination.

Without those provisions, distribution goes to current income beneficiaries in their income proportions, or equally if proportions are unspecified. Without termination provisions or income beneficiaries, distribution goes to the trustor's or testator's then living distributees.

Those distributees are determined under then applicable Delaware intestacy law, as though the trustor or testator had then died intestate, resident in Delaware and owning that real property.

The statutory charitable, employer benefit, filed statutory trust and cemetery care classes are excluded from this duration rule.

For section 503 only, interests in corporations, LLCs, partnerships, statutory trusts, business trusts and other entities are intangible personal property, even when the entity owns land.

If the entity ceases to exist and the trust receives its land, the trust does not become void or subject to termination under the specified perpetuities rules.

Unless the instrument provides otherwise, the trustee may distribute that land under section 503(b) or exchange it for an interest in another qualifying entity.

Review GST exemption separately from duration

An individual or executor may allocate that individual's generation skipping transfer, or GST, exemption to property for which the individual is the transferor. An allocation, once made, is irrevocable.

The GST exemption equals the calendar year's basic exclusion amount. It does not include a deceased spouse's unused exclusion. Allocation timing requires separate review.

The GST applicable rate equals the maximum federal estate tax rate multiplied by the transfer's inclusion ratio. The maximum rate is determined at the taxable distribution, taxable termination or direct skip, as applicable.

A zero inclusion ratio produces a zero applicable rate. The trust's name or duration does not establish that a particular transfer has a zero inclusion ratio.

Bring the funding history and exemption allocation records to the tax review. Ask the adviser to identify what those records establish before discussing the trust's future transfers.

Two related terms

Ascertainable standard: A standard that limits distributions by reference to health, education, maintenance or support.

Irrevocable trust: A trust that generally cannot be revoked unilaterally by its settlor. Modification or termination may be available under its terms or state law.

An Investor Advantage perspective

A panel participant described the ambition to build a dynasty among the family office founders interviewed. That ambition is a useful starting point for discussing what the family wants its ownership plan to accomplish.

"And we found that 77% of the founders of family offices want to build a dynasty. And this is where growth comes in in terms of the the family office."

Common questions