A legacy trust can help you leave a legacy that will benefit future generations. Here, learn how it works and whether it might be right for you.
Perhaps you own a family business that you hope will benefit your great-grandchildren and beyond. Or maybe you own a portfolio of investment real estate in a closely held entity that could generate a stable income stream for your descendants well into the future. If you have ever dreamed of creating a legacy that will last for generations to come — while helping to minimize taxes and other factors that could deplete valuable assets over time — a legacy trust could be worth considering.
A legacy trust, also known as a dynasty trust, is an irrevocable trust meant to help protect your wealth and provide benefits for multiple generations of your family while potentially minimizing the impact of state, estate, and transfer taxes. (Learn about additional kinds of trusts here.)
“These trusts can last, in theory, forever,” explains Paul Griffith, fiduciary manager with Wells Fargo Wealth & Investment Management. “They never have to come to an end, although you can specify any length of time you want. They also help protect valuable assets from federal estate transfer taxes while allowing them the potential to appreciate within the trust.”
However, upcoming changes to the tax code could significantly impact some important aspects of legacy trusts. Here’s what to know about these trusts — and why a legacy trust might be worth considering sooner versus later.
The how and why of legacy trusts
A legacy trust can hold a wide variety of assets, from traditional investment portfolios to specialized assets such as real estate, family businesses, closely held business interests, and oil and gas interests. You can even fund the trust with just cash.
“Our high-net-worth clients often create numerous trusts, but I’ve found the legacy trust is almost always the most important,” says Jake Schaffer, trust advisor with Wells Fargo Wealth & Investment Management. “In my experience, legacy trusts are usually funded with their most important assets, and these clients often use 100% of their wealth transfer tax exemptions to fund them.”
In 2023, the exemptions stand at $12,920,000. That means each spouse could fund a trust with assets worth $12,920,000, or the couple’s combined exemption of $25,840,000. However, that’s set to change in 2025. See more on that below.
One of the benefits of a legacy trust is that assets inside the trust may appreciate without being subject to wealth transfer taxes, so you could end up protecting a far greater portion of your estate over time.
“If your business is worth $12 million when you place it into the trust, it may grow exponentially without incurring more wealth transfer taxes. What matters is the value of the asset when you put it into the trust,” explains Schaffer.
Legacy trusts and upcoming tax changes
Current laws governing wealth transfer tax exemptions will sunset on December 31, 2025, returning the federal wealth transfer exemptions to $5 million (adjusted for inflation) per individual. That change will significantly impact the tax-exempt amount that can fund a legacy trust.
“Legacy trust owners have to decide whether they want to use their exemptions today or lose more than half of it in 2025,” says Schaffer, while noting that legislators could decide to continue the current exemptions.
Schaffer says that it could be a mistake to wait to see if the exemptions are continued before creating a legacy trust. They can be time-consuming to draft, and it can take a long time to transfer assets into the trust. “It can easily take a year to complete,” he says. “”Therefore, if an investor has a net worth high enough to take advantage of today’s exemptions, they may want to consider beginning the process now instead of waiting until 2025.”
Before you sign: Three legacy trust considerations
Legacy trusts can offer tax benefits, but they also bring a lot of legal and financial complexity to the estate planning process. “We want to make sure these trusts are as flexible as possible, because they’re intended to last a really long time,” says Griffith.
Here’s what to consider to help you determine whether a legacy trust may be right for you.
- Legacy trusts are irrevocable. Assets placed within the trust are owned and controlled by the trust. “You have to be prepared to let go of the actual ownership of the business or the property, even though the family still has a certain amount of control,” says Schaffer. “At the same time, you’re avoiding the dilution of ownership that comes over the course of many generations.”
- Legacy trusts can be flexible. Even though legacy trusts are irrevocable, they can be written to accommodate changing circumstances that may occur over time. “For example, you can position your trust so that if the laws change in one state, you can move the trust to another state,” says Griffith.
- Legacy trusts can be specific. In addition to helping protect assets from wealth transfer taxes, legacy trusts give you an opportunity to express your intent as to how or when beneficiaries may obtain trust benefits. Griffith says, “You could specify that the trust is specifically designed to provide educational benefits to your grandchildren and more remote generations. Or you could permit distributions to help a beneficiary purchase their first home or business.”
In other words, your legacy trust can be as tailored as you want and need it to be. And while it can take time to ponder the details, the results can be worth it and future generations may thank you for your efforts.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.
