Dynasty Trusts and GST Tax for Tech Wealth: The Multi-Generational View

A founder gifts $13.99M of pre-IPO stock (plus $5M of liquid diversified assets) to a dynasty trust in December 2025, using her full 2025 lifetime exemption. She also allocates $13.99M of generation-skipping transfer (GST) exemption to the trust.

The trust holds the assets for her children during their lives, then her grandchildren, then her great-grandchildren. Distributions are made at trustee discretion for specific purposes (health, education, maintenance, support). At each generation’s death, the trust assets are not in any descendant’s estate.

Over 60 years, the stock portion grows from $14M to $600M. The liquid assets, compounding conservatively, grow to $40M. Total trust value at year 60: $640M. Estate tax on this $640M across three generations: zero (the trust’s GST exemption covers the full trust, protecting it from GST tax).

Compared to leaving the same $14M to children outright (who would owe estate tax at their deaths, then the grandchildren’s inheritance would face tax again), the dynasty trust preserves 40%+ of value across three generations vs the alternative. On a $640M trust end value, that’s potentially $256M of additional family wealth preserved.

The structure

A dynasty trust is an irrevocable trust structured to exist for multiple generations, typically for the maximum duration permitted by state law. Common features:

Long duration. Delaware, South Dakota, Nevada, and some other states allow trusts for 1,000 years or perpetually. Other states have shorter perpetuities periods.
Discretionary distributions. Trustee has broad discretion on distributions to beneficiaries.
Multiple beneficiary generations. Children, grandchildren, great-grandchildren, and beyond are potential beneficiaries.
Asset protection. Trust assets protected from beneficiaries’ creditors and divorcing spouses.
GST tax exempt (properly allocated). Assets pass between generations without GST tax.

The GST tax framework

Generation-skipping transfer (GST) tax under IRC §§2601-2664 applies to transfers that skip a generation (e.g., directly to grandchildren instead of children). Without GST exemption, GST tax is imposed at 40% on such transfers.

GST exemption is equal to the estate and gift tax exemption: $13.99M (2025) per person.

For a dynasty trust: if the grantor allocates GST exemption to the trust at funding, the trust’s “inclusion ratio” is zero. Distributions from the trust to grandchildren or great-grandchildren are not subject to GST tax. The trust can make distributions across generations indefinitely without GST tax.

Why dynasty trusts matter

Without dynasty planning:

Generation 1 (grantor) has estate.
At generation 1’s death, estate tax applies on amount above exemption.
Heirs receive assets into their own estates.
Generation 2’s death, estate tax applies again on what they left.
Generation 3 inherits, estate tax applies again.

With dynasty trust:

Grantor funds trust, uses exemption.
Trust assets never return to anyone’s estate.
Each generation enjoys distributions without the assets being in their estate.
No estate tax at each death.

Over 100 years with two or three generational transitions and 6% growth, the difference between dynasty-trust preservation and traditional taxation is enormous. Estimates: 30-50% of wealth preserved in dynasty structures compared to alternatives.

State considerations

State choice for dynasty trust situs matters. Desirable states:

Delaware. Strong trust law, no trust income tax, 1,000-year allowed duration.
South Dakota. No state income tax on trust, perpetuity allowed.
Nevada. Asset protection, 365-year term.
Alaska. Domestic asset protection trust law, 1,000-year term.
Wyoming. 1,000-year term, favorable trust law.

These states are regularly chosen for dynasty trusts even when the grantor and beneficiaries live elsewhere. Situs doesn’t require residence by grantor or beneficiaries.

State income taxation varies:

Delaware: no state tax on trust income if trust has no Delaware-source income and no Delaware beneficiaries.
South Dakota: no state income tax.
California: taxes trusts on California-source income or with California beneficiaries. Problematic for California families.

California families often use Delaware or South Dakota dynasty trusts despite the California resident rules.

Allocation of GST exemption

GST exemption must be specifically allocated to the trust at funding (or on a specific timing basis). Allocation is done on Form 709 (gift tax return) for gifts, or Form 706 for estate transfers.

For a trust funded in 2025 with $13.99M of assets and intended for multi-generational benefit:

Grantor files Form 709 reporting the gift.
On Schedule C or Schedule D, grantor allocates GST exemption to the trust.
Allocation amount = $13.99M (the gift value).
Trust’s inclusion ratio = 0 (fully GST-exempt).

Partial allocation: if grantor has only $7M of GST exemption remaining, can allocate $7M to a $14M trust. Trust’s inclusion ratio is 50% (half exempt, half subject to GST at 40% if a GST event occurs).

Proper allocation is critical. An error in Form 709 preparation can leave a trust partially or fully GST-exposed, with 40% tax on future generation-skipping events.

Trust powers and flexibility

Dynasty trust documents balance longevity with flexibility:

Trust protector. Independent party with power to amend trust provisions, change trustees, change situs, or adjust beneficiaries in response to changing circumstances.
Distribution standards. Often HEMS (health, education, maintenance, support) for lifetime beneficiaries, with broader discretion for independent trustee.
Spendthrift provisions. Protect trust from beneficiary creditors and divorces.
Investment flexibility. Trustee empowered to invest in various asset classes including concentrated employer stock.

Modern dynasty trusts use decanting provisions (moving trust assets to new trust with better terms) and NJSA (non-judicial settlement agreements) for flexibility.

Funding strategies

Initial funding ideally combines:

Low-basis high-appreciation potential assets (like pre-IPO stock). Appreciation happens outside the estate.
Liquid assets for trust administration and distribution needs.
Qualified appraisal for any illiquid assets.

Continuing contributions can occur via:

Annual exclusion gifts to the trust (currently $18K per donee per donor).
Additional lifetime exemption gifts if exemption remains.
GRAT terminations pouring over to the dynasty trust.
Transfers from expired SLATs.

Interaction with QSBS

QSBS stock in a dynasty trust is tricky. The $10M QSBS exclusion applies per taxpayer. The dynasty trust is its own taxpayer. If the founder contributes QSBS stock to a dynasty trust:

Trust is a separate taxpayer.
Trust can potentially claim its own $10M QSBS exclusion at sale, if all other requirements are met (5-year holding, gross-assets test, etc.).
This is “QSBS stacking” and multiplies the exclusion.

Multiple dynasty trusts (for different beneficiary branches or generations) can each claim their own $10M cap, further stacking the exclusion.

Comparison: dynasty vs alternatives

Structure	Grantor access	Heirs access	Protection	Tax advantage
Dynasty trust	None	Via trustee discretion	Asset-protected	No estate or GST tax at deaths; long-term growth outside estates
SLAT	Through spouse	Yes at term or death	Asset-protected	Out of grantor’s estate
Outright gift	No	Yes directly	In heir’s estate	Uses exemption once, then full estate tax at heir deaths
Joint tenancy	Grantor until death	Automatically	No	No estate tax savings
Will with specific bequests	Grantor until death	Per will	In heirs’ estates	Basic estate planning

Frequently asked

What if my state doesn’t allow perpetual trusts? You can situs the trust in another state (Delaware, South Dakota) that does, with appropriate trustee selection.

Do I have to fund the dynasty trust at year-end 2025? Pre-sunset funding uses the higher 2025 exemption. Post-sunset funding uses the 2026 lower exemption. If you have capacity, pre-sunset is typically better.

Can I change the beneficiary class later? Generally no; the class of permissible beneficiaries is fixed in the trust. Trust protector provisions can allow limited modifications.

What about state GST tax? Some states have their own GST tax. Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Maine, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, Washington DC. The structures vary.

Do dynasty trusts file income tax returns? Yes. Form 1041 annually. If grantor-status provisions are used during grantor’s life, trust income may be reported on grantor’s 1040 until grantor’s death.

Next step

If you have long-term wealth transfer goals and are considering dynasty planning, engage estate counsel specializing in multi-generational trusts. Choose situs state based on your specific goals (tax, duration, asset protection). Fund pre-sunset if possible to use 2025 higher exemption. Allocate GST exemption explicitly on Form 709 at the time of funding.