Estate Tax Protection for Ventura

Trusts are very useful, flexible tools to hold assets. They allow for management of assets during your life, upon your incapacity, and for the continued management of the assets after your death. Perhaps you’d continue to hold the assets in trust until your children reach a suitable age to manage the money for themselves, like age 25 or 30. But you could keep the assets in trust even longer. You could keep the assets in trust for the lives of your children, and your children’s children, and so on.

These trusts, sometimes called “Dynasty Trusts” continue for the longest possible time allowed by law. Some states have a “Rule Against Perpetuities.” The Rule in common law says that the asset must vest, if at all, no later than 21 years after the death of a “life in being” when the trust became irrevocable, typically the death of the grantor of the trust. In jurisdictions with the common law Rule Against Perpetuities, you could have the assets in the trust and then at your death, you’d look around and see who is the “measuring life.” Typically, the measuring life is the living beneficiaries of the trust, like your children and grandchildren. The trust must distribute within 21 years of the death of the last of them to die. Let’s say at your death your grandchild is 4 and lives until their 104th birthday. The trust can continue until 21 years after that. So, the trust could continue 121 years in that case.

Many states have adopted the Uniform Statutory Rule Against Perpetuities, which allows a trust to last either the traditional Rule Against Perpetuities period (a “life in being” plus 21 years) or 90 years, if longer. Some states have modified the Rule so that a trust might last 150, 365, or even 1,000 years. Some states have completely repealed the Rule so that a trust could last forever!

Why might you want to keep your assets in a trust that long? First, you can have professional management of the assets to make sure the assets aren’t squandered by the beneficiaries and make sure the assets are distributed in the manner you’ve chosen even long into the future.

Next, a Dynasty Trust can save on estate taxes for families whose wealth is likely to grow well past the federal exemption over multiple generations. Under current law that exemption is $15,000,000 per person, or $30,000,000 for a married couple, made permanent by the One Big Beautiful Bill Act (OBBBA). Because of it, the overwhelming majority of Americans owe no federal estate tax at all. The example below only matters for the small number of families whose estates are genuinely likely to exceed the exemption, generation after generation.

Here is a worked example, using round numbers. The top federal rate is 40%, applied only to the amount of a taxable estate above the exemption, never to the whole estate.

John (age 80, 1st generation) dies and leaves $5 million to his daughter Sally (age 50, 2nd generation), outright. John’s own estate is well under his $15 million exemption, so this transfer costs no federal estate tax at all, which is the ordinary case for nearly everyone.

Sally invests the $5 million. Assume it grows at 7.2% and triples over 30 years, so it is worth $15 million by the time of Sally’s death. Because $15 million is exactly her own exemption amount, none of it is subject to federal estate tax, and the full $15 million passes to her daughter Beth (3rd generation).

Beth invests the $15 million, and it triples again over the next 30 years to $45 million by Beth’s death. Now the exemption matters: $15 million of Beth’s estate is shielded by her own exemption, leaving $30 million taxed at 40%, or $12 million of federal estate tax. Beth’s estate passes the remaining $33 million to her son Josh (4th generation).

Josh invests the $33 million, and it triples over the next 30 years to $99 million by Josh’s death. Applying his own $15 million exemption, $84 million is taxed at 40%, or $33.6 million of federal estate tax, leaving $65.4 million for the next generation.

So, over 90 years and three generational deaths, with the exemption correctly applied each time, the original $5 million grows to about $65.4 million after real federal estate taxes, roughly 13 times the original gift.

But there is a better way for families in this position. If at his death John had instead left the $5 million to a Dynasty Trust for the benefit of Sally and her descendants, and allocated his generation-skipping transfer tax exemption to the trust, the assets would never be included in Sally’s, Beth’s, or Josh’s own taxable estates. There would be no additional estate tax due at any of their deaths. The $5 million would simply triple every 30 years for 90 years, growing to $135 million, free of the transfer taxes calculated in the example above.

Without a Dynasty Trust, correctly applying the exemption still gets the $5 million to about $65.4 million after 90 years, a 13x return. With a Dynasty Trust, the same $5 million reaches $135 million over the same period, a 27x return. That gap is the real advantage of a Dynasty Trust: keeping assets out of each generation’s own taxable estate, not avoiding an exemption that most Ventura families, at $15 million per person and $30 million per married couple, will never come close to using. A Dynasty Trust is not for everyone. Most families’ estates fall under the exemption and need no special planning to avoid federal estate tax. But families whose wealth is genuinely likely to keep compounding past the exemption for generations can still see a meaningful transfer tax advantage from one.