Many estate planning attorneys tout the advantages of a “dynasty trust.” There are several benefits that are commonly mentioned when these trusts are discussed.  In this article, I will discuss a potential downside to these trusts.

Before discussing this issue, I wanted to provide some background on trusts, in general, and dynasty trusts, in particular. A trust is a fiduciary relationship through which one person holds assets for the benefit of another person.

A fiduciary is a person or entity who owes a high duty of care to another person. A trustee owes the beneficiary a high duty of care with respect to the assets being held in the trust for the benefit of the beneficiary.

A person can establish a trust to accomplish many different purposes.  A person might establish a trust to hold assets for a minor child.  A person might establish a trust to hold assets of a disabled person.

The name given to a trust is irrelevant. If Mr. Smith establishes a trust for his minor child, Mary Smith, he might called the trust “The Smith Family Trust” or “The Mary Smith Trust.”  The name is unimportant.

There is no such thing as a “dynasty trust,” but what an estate planning attorney is trying to convey when he uses the phrase dynasty trust is that it is a trust through which a family member passes his assets to future generations of his family.  By harnessing the elder family member’s wealth in the trust, the elder family member is creating a dynasty.

Of course, the use of the word dynasty implies that millions of dollars are being held in the trust.  For the vast majority of the people in the world who do not have millions of dollars, the use of the word dynasty can be intimidating and off-putting.  The average person might feel that a dynasty trust isn’t right for him simply because he isn’t rich.

That impression is incorrect.  Even someone with an estate worth several hundred thousand dollars might consider establishing a dynasty trust for his family.

The benefits of a dynasty trust are as follows:  The trust protects the assets held in the trust from the creditors of the beneficiary.  If the beneficiary is sued, the assets of the trust can be protected from his creditors.  The trust protects the assets of the trust from the beneficiary’s potential divorce.  If the beneficiary gets divorced, the assets held in the trust are less likely to be entangled in his divorce.

But there are disadvantages to any trust, and in particular, there are disadvantages associated with a dynasty trust that by its very terms is designed to last for many years.  A typical trust exists for the benefit of the beneficiary.  The assets of the trust are there to be used to help the beneficiary.

Let’s say that Mr. Smith dies and creates a dynasty trust for his family.  His four children are the initial beneficiaries of the trust and after one of Mr. Smith’s children dies, that child’s share of the trust continues to be held in the trust for the benefit of that deceased child’s children for the remainder of their lives.

Let’s assume that one of Mr. Smith’s sons enters a nursing home.  One of the questions on the Medicaid application is whether the applicant is the beneficiary of a trust.  The son would have to say that he is the beneficiary of a trust.

The assets being held in the trust could now disqualify the son from Medicaid benefits leaving the son with no assets to pay the nursing home unless the assets of the trust are used to pay for his care.  At the very least, the assets of the trust could cause a significant issue as to whether or not the son is eligible for Medicaid benefits.

It’s important to realize that by restricting the use of your assets for decades through a trust, you might essentially trap your assets.