What is a Dynasty Trust in Minnesota — and When Can it Be Litigated?

There are many different estate planning tools in place that can be used in Minnesota to ensure a decedent’s future wishes are carried out. While every estate plan should start with a last will and testament, some might also consider using trusts to meet their objectives. One type of trust that can be used to pass down property from generation to generation, particularly in high net-worth families, is a dynasty trust. But while a dynasty trust can keep an estate out of the probate process, it can also give rise to potential litigation in some situations.

What is a Dynasty Trust?

A dynasty trust, also known as a perpetual trust or a bloodline trust, is an estate planning tool that helps keep wealth within the family bloodline from one generation to the next. These trusts can minimize the estate, transfer, and gift taxes that could substantially impact the assets beneficiaries would receive. Since dynasty trusts are irrevocable, they cannot be changed or modified once created.

After the creator of the dynasty trust has passed away, the terms of the trust become effective. The assets in the trust are then distributed to the beneficiaries who are named in the instrument, in accordance with the instructions set forth. Typically, with these types of trusts, the full amount of assets won’t be distributed at once. In addition, the trust can also specify whether an event must be met in order for distributions to be made at all.

What are the Advantages of a Dynasty Trust?

Families who have acquired a considerable amount of wealth and wish to pass it down can benefit significantly from creating a dynasty trust. From taxes to asset protection, these estate planning vehicles can offer a number of benefits to the grantor — and their chosen beneficiaries. Specifically, the advantages of a dynasty trust can include the following:

• Minimize tax consequences — Dynasty trusts are exempt from federal estate tax consequences, provided that the amount in the trust is under the estate tax exemption amount. Critically, any assets placed in the trust are exempt from taxes on both the grantor’s estate as well as any beneficiary’s estates.
• Protect assets — Dynasty trusts can safeguard assets from claims by creditors, lawsuits, and other financial threats.
• Leave a financial legacy for future generations — A dynasty trust does not include a cutoff date by which the trust is no longer legally valid. This can give the creator of the trust the opportunity to leave a financial legacy for generations to come.
• Allow the trust creator to have control over how assets are distributed — The creator of a dynasty trust can set terms in the trust instrument that can help ensure their goals are satisfied. This can be crucial to provide for beneficiaries who might be financially irresponsible.

It's essential to keep in mind that dynasty trusts cannot be changed. This makes adapting to unanticipated events that may occur in the future more difficult. Unless the trust instrument is drafted to address such unpredictable occurrences, the trust creator’s wishes may not be carried out in the way they had planned. Additionally, it should be noted that Minnesota follows the Rule Against Perpetuities — so these trusts cannot go on forever. They have a fixed duration of 21 years after the death of the last beneficiary who was living at the time the trust was created.

Litigation Involving Dynasty Trusts

While there are several benefits to creating a dynasty trust, there may also be several drawbacks to consider. There could also be issues with a dynasty trust that lead to litigation. For instance, since this type of trust can last for a significant amount of time, it could potentially outlive the trustee named. This can give rise to disputes about who has the authority to oversee the trust. It may be best to name a professional fiduciary as trustee, such as a financial institution or another corporate trustee.

Problems with dynasty trusts leading to litigation can also arise due to the following:

• High legal fees — There are usually very high trustee and legal fees associated with a dynasty trust. This can result in little or nothing being left to beneficiaries.
• Misconduct among trustees — Typically, a trustee of a dynasty trust will have discretion regarding what distributions to make. While there is no court oversight of trusts, this can give rise to misconduct among trustees or successor trustees.
• Small distributions to beneficiaries — Since there are often large trustee fees and legal fees that must be paid, trust distributions to beneficiaries are often very small. As a result, the beneficiaries may commence legal action.

Other potential drawbacks of dynasty trusts that can result in litigation include the inability to change the terms of the trust once it has been created — and the potential for family conflict. For instance, if beneficiaries feel restricted due to the inflexibility of these types of trusts or disagree with the terms, litigation may arise.

Contact an Experienced Minnesota Trust Litigation Attorney

If you are facing a dispute concerning a dynasty trust, it’s crucial to have an experienced trust litigation attorney by your side. At Dave Burns Law Office, I provide trusted representation and committed counsel for a wide variety of trust matters in Minnesota, including those involving dynasty trusts. To learn more about how I can assist you, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I assist clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.