When it comes to estate planning, ensuring your wealth is preserved for generations requires more than just a basic trust. That’s where dynasty sub-trusts come in—a strategic tool that protects assets, minimizes taxes, and provides long-term financial security for your family. But what exactly is a dynasty sub-trust, and how does it fit into a larger estate plan?

In this post, we’ll explore how dynasty trusts work within a primary trust structure, the benefits they offer, and how they can help secure your legacy for generations to come.

What is a Sub-Trust?

This is the latest installment in our series on sub-trusts. For general information on sub-trusts, read our comprehensive blog here.

In short, a sub-trust is a trust created under the umbrella of a primary trust, often serving a specific purpose. A dynasty trust, when used as a sub-trust, is a powerful tool for long-term wealth preservation. It is particularly beneficial for complex estates with multiple beneficiaries who want asset protection and controlled distributions over generations.

What is a Dynasty Trust?

A dynasty trust is an irrevocable trust designed to keep inherited wealth separate and protected for multiple generations. Unlike traditional trusts that distribute assets outright at specific ages, a dynasty trust keeps assets in trust while allowing the beneficiary to become the trustee of their own sub-trust—typically at age 35.

Why is this important?

Many beneficiaries do not realize that if they co-mingle inherited assets with their spouse (such as depositing them into a joint account), they may lose their separate property protection.

This is especially a concern in Arizona and California, where inherited property is separate by default, but once mixed with marital property, it can be legally transmuted into community property—meaning a divorcing spouse may have a claim to it.

By keeping assets inside a dynasty sub-trust, beneficiaries can’t accidentally transmute the inheritance—and they can always blame their parents for the restriction!

Dynasty Trust as a Sub-Trust

A dynasty trust can be structured as a sub-trust within a primary estate plan, typically inside a revocable living trust or family trust.

When structured this way:

The dynasty sub-trust is funded upon the grantor’s passing.
Assets remain separate property and are protected from claims in lawsuits or divorces.
The beneficiary eventually becomes the trustee of their own sub-trust, typically at age 35.

This structure ensures the assets are managed within the family line while still providing flexibility.

The Key Benefit: Keeping Inheritance as Separate Property

The number one reason to use a dynasty trust is to ensure inherited assets remain separate property—not just for your child but for future generations.

Many married beneficiaries unintentionally lose their inheritance protections by depositing funds into joint accounts, using them to buy community assets, or otherwise mixing them with marital property.

In Arizona and California, inherited assets start as separate property, but they often get transmuted into community property over time.
Once that happens, a divorcing spouse could claim half of the inheritance!
By keeping assets inside the dynasty trust, this risk is eliminated.

And the best part? Your kids don’t have to be the bad guy—they can blame you for the restriction!

The “Power of Disappointment”: Choosing the Next Beneficiary

One unique feature of dynasty trusts is the power of appointment, which determines who will inherit the trust next.

What is a Power of Appointment?

A power of appointment allows the beneficiary to name the next beneficiary after them. This keeps the assets within the family while providing flexibility for changing circumstances.

A Fun Way to Remember: The “Power of Disappointment”

If a beneficiary doesn’t like their children’s choices, they can exercise their power of appointment—or, as we like to call it, their power of disappointment—by redirecting the assets elsewhere!

For example:

In the case that their child is responsible, they can keep the trust in the family line.
If not, they can skip a generation or redirect assets to a more responsible heir.
If necessary, they can even appoint a charity or another trusted person.

This feature gives beneficiaries a valuable tool to control how wealth is passed down—without disrupting the protection and tax benefits of the trust.

How to Structure a Dynasty Sub-Trust

1. Establish a Primary Trust

The revocable living trust or family trust will outline when and how the dynasty sub-trust is created and funded.

2. Define the Beneficiaries

Common beneficiaries include children and grandchildren, but the dynasty trust can extend to future generations using the power of appointment.

3. Appoint a Trustee

Initially, the main trustee manages the dynasty sub-trust.
At age 35, the beneficiary can become their own trustee and manage their sub-trust assets.
Successor trustees should be named in case the original trustee can no longer serve.

4. Establish Distribution and Control Terms

Instead of receiving outright distributions, beneficiaries gain control by becoming trustee of their sub-trust while keeping assets protected.

5. Fund the Dynasty Sub-Trust

Upon the grantor’s passing, designated assets—including stocks, bonds, real estate, and business interests—will transfer into the dynasty sub-trust. Proper funding is essential for the trust to be effective.

Dynasty Sub-Trusts: A Smart Strategy for a Lasting Legacy

A dynasty sub-trust is a powerful estate planning tool that offers:

Multi-generational wealth protection
Tax-efficient asset growth
Automatic separate property protection
Flexibility to name future beneficiaries

By structuring your estate plan with a dynasty sub-trust, you can ensure your legacy remains intact, your children’s inheritance stays protected, and they never have to be the bad guy when explaining why their spouse can’t touch the money!

If you’re considering setting up a dynasty sub-trust or want expert guidance on incorporating sub-trusts into your estate plan, contact Rilus Law today to explore your best options.

Types of Sub-Trusts: What is a Dynasty Trust?