Revocable Living Dynasty Trust (RLDT)


  • Author Thomas Swenson
  • Published February 1, 2023
  • Word count 1,683


A revocable living dynasty trust enables the settlor to maintain control and have complete access to trust assets during settlor's lifetime. Upon settlor's death, the trust becomes irrevocable, providing wealth building, asset protection and tax benefits to settlor's spouse and many generations of descendants.

As described herein, a revocable living dynasty trust (RLDT) is arguably the most flexible and useful tool for estate and legacy planning, especially for the moderately wealthy. "Moderately wealthy" means an individual or couple having a net worth less than the unified gift and estate tax exemption and generation skipping transfer tax (GSTT) exemption. Currently, these exemptions are $12+ million for each individual, $24+ million for a couple. These amounts are scheduled to decrease to $6+ million per individual, $12+ million per couple, starting 2026. (Of course, a fickle, impetuous U.S. Congress could change the exemption amounts, as well the entire estate planning regime, at any time, so it is important to continuously monitor relevant statutes, case law, and regulations in order to adjust (or rescue) structures and plans accordingly.)

Often, a married couple establishes an RLDT and funds it with jointly owned property. The rest of this paper, however, discusses the simpler case of a single individual creating and funding a RLDT, with the understanding that lessons presented here can be extended to a married couple's joint trust.

The term "settlor" herein (also "grantor") is the person who establishes and funds an RLDT by contributing property to it. In trust law, the trustee is the legal owner of trust assets, while one or more beneficiaries are "beneficial owners" of the trust assets. A trustee is a fiduciary and is legally bound to act exclusively for the benefit of the trust beneficiaries.


A key feature of an RLDT is that it is initially revocable. Assets contributed to a revocable trust are not completed gifts, by definition, because the settlor can amend or revoke the trust at any time before death. Upon settlor's death, the RLDT automatically becomes irrevocable.

Settlor's Access to RLDT Assets While Living

The settlor of an RLDT always has access to trust assets since the settlor has the power to revoke or amend the trust at any time while the settlor is still alive. Indeed, most often the settlor is designated the primary beneficiary of the trust.

Settlor control of and access to RLDT assets is one of the main advantages of an RLDT compared to other, irrevocable trusts. For the moderately wealthy, the idea of relinquishing all control and benefits of trust assets during their lifetime can be a major psychological barrier if considering irrevocable dynasty trusts. Of course, for the very rich, giving up benefits from an irrevocable trust is not a great concern – they have enough money to create irrevocable trusts and still have plenty of non-trust assets for their financial security. The moderately wealthy, however, (e.g., net worth $2-10 million), understandably have reservations about giving away so much money that they might be left wanting in the future. Thus, the features of an RLDT that allow the settlor to benefit from trust assets make RLDT funding easier to embrace.

Substitute for Will and General, Durable Power of Attorney; Avoid Probate

A revocable living trust helps avoid potentially expensive and drawn-out probate proceedings for the settlor's assets in his estate. Since major assets are already in the trust, a simplified probate process (usually without lawyers) is possible for minor assets outside the trust. A trust can perform the function of a Will, but more easily, cheaply, flexibly and efficiently, and a trust can continue indefinitely. Execution of a Will is supposed to be completed within a few years. Estate assets under a Will are supposed to be distributed to beneficiaries as quickly as possible. Thereafter, a beneficiary can use the share wisely, or he can squander it, or lose it in bankruptcy or to an angry ex-spouse in divorce. Unfortunately, typical, off-the-shelf revocable trusts end shortly after the death of the settlor, that is, their main purpose is simply to be a Will substitute. Another common purpose of a standard revocable living trust is to facilitate the use of trust assets for the benefit of the settlor when the settlor becomes physically or mentally incapacitated. While living, the settlor is the primary beneficiary of the RLDT. Accordingly, a trustee manages and uses trust assets for the sole benefit of the settlor (similar to the fiduciary duty of an agent under a general power of attorney).

In contrast to typical revocable living trusts, an RLDT is designed to continue for generations and provide beneficiaries with well-known benefits of irrevocable dynasty trusts.

Asset Protection

During the settlor's lifetime, an RLDT provides no asset protection. Upon death of the settlor, however, the trust becomes irrevocable, and if properly designed, trust assets are protected against creditors (i.e., debts) of trust beneficiaries. In fact, many trust settlors have no urgent need for asset protection – their marriages are stable, they have adequate liability insurance policies, they do not engage in risky occupations, and they know how to build and manage wealth successfully. Spouses and children are often a different matter, however. While a surviving spouse and descendants can enjoy the benefits of an RLDT, trust assets are protected against frivolous lawsuits, bankruptcy, angry ex-spouses, and spendthrifts.

Basis Step-Up

In contrast to irrevocable trusts, assets owned in a RLDT are considered to be in the settlor's estate and, therefore, receive an automatic step-up in basis upon the settlor's death. Thus, the trust can sell the assets without recognizing capital gains.

Dynasty Trust Status by Allocation of GSTT Exemption

Allocation of the settlor's gift and estate tax exemption and generation-skipping transfer tax (GSTT) exemption to trust assets means no estate tax will be owed upon the settlor's death, and no GST tax will be owed on future distributions of trust income or principal. Under current, long-standing law, an RLDT can be designed to last for generations, even for perpetuity. [Some members of the U.S. Congress are always scheming to eliminate the tax benefits of dynasty trusts. So far, they have not succeeded.]

Discretion of Successor Trustees = Asset Protection

Upon death of the settlor, a well-designed RLDT gives successor trustees full discretion in making distributions (or not) from the trust to individual beneficiaries. Since distributions are discretionary, no court or other actor can force a trustee to pay the debts of a beneficiary.

Family Legacy

As a dynasty trust, an RLDT can support a family legacy for generations, maintain family values and unity, build wealth, provide financial security, and invest in beneficiaries' education and business ventures. For example, the trust could own and maintain one or more family homes, places for the family to meet and enjoy vacations.

Asset management and tax issues. While it is important for asset protection purposes for a "distribution trustee" to have complete discretion regarding the distribution of funds to individual beneficiaries, family members may participate in the management of trust-owned assets and businesses. Trust taxation is a thorny issue for trusts after death of the settlor (grantor). Generally, any taxable trust income not distributed to one or more beneficiaries (who then pay the taxes at individual tax rates) is taxed at trust tax rates, which are punitive. For example, in 2022, trust income is taxed at the maximum federal rate of 37% starting at about $13.5K.

Trust Taxation Solution = Never Pay Taxes Again

Under IRC §§ 101 and 7702, cash value of a life insurance policy grows essentially tax-free and life insurance proceeds (death benefit) are paid income-tax-free to the policy owner. Thus, when a dynasty trust (i.e., GST trust) owns life insurance on the life of a beneficiary, policy cash value grows tax-free. The policy can thereby serve as a source of tax-free income to the trust through tax-free policy loans and/or tax-free death benefit. Because an RLDT becomes a GST (dynasty) trust upon death of the settlor, no GST tax is due on distributions to beneficiaries. In other words, wealth in the form of life insurance cash value can continue to grow and be distributed to beneficiaries completely tax-free for generations, forever. As the death benefit of one life insurance policy is paid upon an insured beneficiary's death, the trust can buy one or more new policies on the lives of younger beneficiaries, continuing the cycle indefinitely. Of course, an RLDT can own assets that are not life insurance, but then income and capital gains would need to be recognized, as described above.

Summary of RLDT Benefits

An RLDT does not provide asset protection against the settlor's creditors. But, on the other hand, while still alive, the settlor keeps full control, access and enjoyment of trust assets. Further, when a properly designed and funded RLDT becomes an irrevocable dynasty trust upon the settlor's death, it provides remainder beneficiaries many benefits, including:

– Asset protection (e.g., against frivolous lawsuits, bankruptcy, angry spouses, spendthrifts)

– Estate-tax-free and GST-tax-free generational wealth transfer, perpetually

– Impartial asset management & distribution (w. professional trustee)

– Trustee flexibility and discretion in distributing benefits to beneficiaries

– Continuation of settlor's wishes and family values (beyond the grave)

– Family business management and continuation

– Tax-free wealth-building (cash value growth), death benefit, and distributions enabled by trust-owned life insurance

If you would like more information about retirement, estate and legacy planning, phone Thomas Swenson, JD, at 303-440-7800.

Copyright © 2023 Thomas Swenson, J.D.

Warning Disclaimer: This is not legal, insurance or tax advice. No person should assume that any information presented or made available on or through this article or linked websites may be construed as legal, insurance or tax planning advice. Personalized legal, insurance and financial planning and advice can only be rendered after written engagement for services. Please contact Law Office of Thomas J Swenson for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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