Dynasty Trust in Florida

What Is a Dynasty Trust?

A dynasty trust is an irrevocable trust designed to hold and grow family wealth for multiple generations, potentially in perpetuity, without the trust assets being subject to estate tax, gift tax, or generation-skipping transfer (GST) tax at any generational level. Unlike a traditional trust that terminates after one or two generations, a dynasty trust is structured to last as long as the governing state law allows, providing ongoing financial benefits, asset protection, and tax savings for the grantor's children, grandchildren, great-grandchildren, and more remote descendants.

At the Law Offices of Albert Goodwin, PA, we help high-net-worth families throughout the Miami metropolitan area establish dynasty trusts under Florida law. Florida is one of the most attractive jurisdictions in the country for dynasty trust planning because state law permits trusts to continue indefinitely for interests created after December 31, 2000, and the state imposes no income tax on trust income.

Florida's Trust Duration Rules Under F.S. § 689.225

The foundation of dynasty trust planning in Florida is the state's treatment of the rule against perpetuities. Historically, the rule against perpetuities limited the duration of trusts and other future interests to a period of lives in being plus 21 years. This common-law rule was designed to prevent property from being tied up in trust indefinitely and to ensure that future generations had the ability to freely use and transfer property.

Florida substantially reformed its perpetuities rules through amendments to F.S. § 689.225. Under F.S. § 689.225(2)(f), the common-law rule against perpetuities does not apply to a nonvested property interest in, or a power of appointment with respect to, a trust or a trust interest created after December 31, 2000. For trusts created on or before that date, the statutory rule against perpetuities under F.S. § 689.225(2) applies a 360-year wait-and-see period rather than the traditional lives-in-being-plus-21-years standard.

The practical effect of F.S. § 689.225(2)(f) is that a trust created in Florida after December 31, 2000, can last forever. There is no statutory time limit after which the trust must terminate and distribute its assets. This makes Florida one of a select group of states, alongside South Dakota, Nevada, Alaska, Delaware, and a handful of others, that permit truly perpetual dynasty trusts.

Vested vs. Nonvested Interests

It is important to note that F.S. § 689.225(2)(f) applies to nonvested property interests and powers of appointment in trust. A vested interest is one that is certain to take effect in possession at some point, while a nonvested interest is contingent upon the occurrence of some condition. In the context of a dynasty trust, the interests of unborn future beneficiaries are nonvested interests that are exempt from the rule against perpetuities under the Florida statute. The trust attorney must draft the trust carefully to ensure that the interests created fall within this exemption and that the trust's perpetual duration is legally supported.

Tax Advantages of a Dynasty Trust

Estate Tax Avoidance Across Generations

The primary tax advantage of a dynasty trust is the elimination of estate tax at every generational level after the initial transfer. When the grantor funds a dynasty trust and allocates their GST tax exemption to achieve an inclusion ratio of zero, the trust assets are permanently exempt from the federal estate tax, GST tax, and gift tax. This means that even if the trust grows to hundreds of millions of dollars over several generations, no transfer tax is ever imposed on the trust assets as they benefit successive generations of descendants.

To illustrate the power of this compounding effect, consider a dynasty trust funded with $10 million that grows at an average annual rate of 7% after distributions for beneficiaries. After 50 years, the trust could hold approximately $29 million. After 100 years, it could exceed $87 million. After 150 years, it could surpass $260 million. At each generation, the family avoids the 40% federal estate tax that would have applied had the assets been held in the beneficiaries' individual estates. Over multiple generations, the cumulative tax savings can be extraordinary.

GST Tax Exemption Allocation

The effectiveness of a dynasty trust depends on the proper allocation of the grantor's generation-skipping transfer tax exemption, currently $13.61 million per individual under the TCJA. By allocating the full GST tax exemption to the dynasty trust, the grantor creates a trust with an inclusion ratio of zero, meaning no GST tax will ever be imposed on the trust or its distributions. This exemption allocation is made on IRS Form 709 and must be documented carefully. For a detailed discussion of GST tax planning, see our page on generation-skipping trusts.

Because the TCJA's increased GST tax exemption is scheduled to sunset on December 31, 2025, families should act promptly to establish and fund dynasty trusts while the current high exemption is available. After the sunset, the exemption is expected to decrease to approximately $7 million per individual, significantly reducing the amount that can be sheltered in a dynasty trust.

No Florida State Income Tax

Florida's absence of a state income tax is another compelling reason to establish a dynasty trust in this state. Trust income earned within a Florida dynasty trust is not subject to any state-level income tax, allowing the trust's assets to grow and compound at a faster rate than in states that impose state income taxes on trust income. States like California (top rate 13.3%), New York (top rate 10.9%), and New Jersey (top rate 10.75%) impose substantial income taxes on trust income, which over the course of a perpetual dynasty trust can erode millions of dollars in growth.

For families currently residing in high-tax states who wish to establish dynasty trusts, Florida is frequently chosen as the trust situs. Moving the trust administration to Florida, appointing a Florida trustee, and ensuring that the trust is governed by Florida law can potentially eliminate state income tax on the trust's accumulated income. However, the tax analysis depends on the specific circumstances, including the residence of the beneficiaries and the nature of the trust's income.

Asset Protection Features

A properly drafted dynasty trust provides robust asset protection for each generation of beneficiaries. Because the trust assets are owned by the trust and not by any individual beneficiary, those assets are generally beyond the reach of the beneficiaries' creditors. Florida law provides several layers of protection that make dynasty trusts particularly effective asset protection vehicles.

Spendthrift Provisions

Under F.S. § 736.0502, a trust that includes a valid spendthrift provision restrains both voluntary and involuntary transfers of a beneficiary's interest. This means that a beneficiary cannot pledge, assign, or otherwise transfer their trust interest, and a creditor cannot garnish, attach, or levy against the beneficiary's trust interest. The spendthrift provision protects each generation of beneficiaries from the claims of their individual creditors, including business creditors, tort claimants, and former spouses.

Spendthrift protection has certain limitations under Florida law. Under F.S. § 736.0503, a court may order the trustee to make distributions to satisfy a beneficiary's child support or alimony obligations, and certain government claims may also reach trust assets. Despite these exceptions, the spendthrift provision provides meaningful protection for the vast majority of creditor claims. For a more detailed discussion, see our page on spendthrift trusts.

Discretionary Distribution Standards

A dynasty trust is typically drafted with discretionary distribution provisions, giving the trustee the authority, but not the obligation, to make distributions for the beneficiaries' health, education, maintenance, and support. Under F.S. § 736.0504, the assets of a trust that are subject to the trustee's discretion are generally protected from the claims of the beneficiary's creditors, even beyond the protection provided by a spendthrift clause. By combining discretionary distributions with spendthrift provisions, the dynasty trust provides a dual layer of creditor protection for each generation.

Structuring a Florida Dynasty Trust

Trust Governance

Because a dynasty trust is designed to last for many generations, the trust instrument must include flexible governance provisions that allow the trust to adapt to changing circumstances. Key structural elements include:

• Trustee succession. The trust should provide a clear mechanism for appointing successor trustees when the original trustee dies, resigns, or becomes incapacitated. Corporate trustees, such as banks and trust companies, can provide continuity, but the trust should also allow for the appointment of individual co-trustees to ensure that family knowledge and values are represented in trust administration.
• Trust protector. A trust protector is an independent third party who holds specific powers over the trust, such as the power to amend administrative provisions, change the trust's governing law or situs, remove and replace the trustee, or modify distribution standards to respond to changes in tax law. Trust protectors are a critical feature of dynasty trusts because they provide a mechanism for adapting the trust to circumstances that the grantor could not have foreseen at the time of creation.
• Limited powers of appointment. Beneficiaries may be given limited powers of appointment that allow them to direct the disposition of their share of the trust among a defined class of permissible appointees, typically their descendants. These powers give each generation some control over how wealth is distributed without causing estate tax inclusion under 26 U.S.C. § 2041.
• Division into separate trusts. The trust instrument should authorize the trustee to divide the dynasty trust into separate trusts for individual beneficiaries or family lines. As the family grows, administering a single trust for dozens or hundreds of beneficiaries becomes impractical. The ability to divide the trust into separate sub-trusts provides administrative efficiency and allows distributions to be tailored to each beneficiary's circumstances.

Choice of Trustee

The selection of the initial trustee and the succession plan for future trustees are among the most important decisions in dynasty trust planning. The trustee of a dynasty trust has a fiduciary duty under F.S. § 736.0802 to administer the trust solely in the interests of the beneficiaries and in accordance with the trust terms. Given the potentially perpetual duration of the trust, the trustee must be capable of managing trust assets prudently under the Florida Prudent Investor Act (F.S. § 518.11), maintaining accurate records, providing accountings to qualified beneficiaries under F.S. § 736.0813, and navigating complex tax reporting requirements.

Trust Decanting

Florida's trust decanting statute, F.S. § 736.04117, is a particularly valuable tool for dynasty trusts. Decanting allows a trustee with discretionary distribution authority to distribute trust assets from the existing dynasty trust into a new trust with different administrative or dispositive terms. This provides a mechanism for updating the trust's provisions to respond to changes in law, family circumstances, or investment conditions without the need for court approval or beneficiary consent, and without adverse tax consequences if properly structured.

Funding a Dynasty Trust

A dynasty trust is typically funded with a combination of cash, marketable securities, closely held business interests, life insurance, and other assets that are expected to appreciate significantly over time. The choice of funding assets is important because the goal is to maximize the long-term growth of the trust within the constraints of the GST tax exemption.

Life insurance is a particularly effective funding mechanism for dynasty trusts. By holding a life insurance policy on the grantor's life within the dynasty trust, the trust receives the death benefit free of income tax, and because the GST tax exemption has been allocated to the trust, the proceeds are also free of estate and GST tax. The trust can then invest the death benefit for the benefit of future generations indefinitely.

Assets that are expected to appreciate substantially, such as interests in a family business or real estate, are also well-suited for dynasty trust funding. If these assets are transferred to the trust at a time when their value is relatively low, the subsequent appreciation occurs within the trust and is permanently sheltered from transfer taxes. This leveraging effect is one of the most powerful aspects of dynasty trust planning.

Dynasty Trusts and Florida Real Estate

Many South Florida families hold significant real estate assets, including commercial properties, investment properties, and vacation homes. A dynasty trust can own Florida real estate, allowing the family to retain and benefit from valuable properties across multiple generations without the properties being subject to estate tax at each generational transfer. However, Florida homestead property is subject to special constitutional restrictions and generally should not be held in a dynasty trust without careful analysis of the homestead implications.

Contact a Miami Dynasty Trust Attorney

A dynasty trust is one of the most powerful wealth preservation tools available under current law, and Florida is one of the best states in the nation to establish one. With the combination of perpetual trust duration under F.S. § 689.225, no state income tax, robust spendthrift protections, and flexible trust administration provisions under the Florida Trust Code, a Florida dynasty trust can protect and grow family wealth for generations to come. With the TCJA sunset approaching, now is the time to act.

The Law Offices of Albert Goodwin, PA represents individuals and families throughout Miami-Dade County, Broward County, and Palm Beach County in all aspects of dynasty trust planning, estate tax planning, and trust administration. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134. To schedule a consultation, call us at 786-522-1411 or email [email protected].