Dynasty trust tax rules govern how long-term trusts avoid repeated estate taxation and apply the generation-skipping transfer (GST) tax. When a grantor allocates GST exemption to transfers into the trust, appreciation can pass to grandchildren and later generations without additional estate or GST tax. Income taxation depends on whether the trust is grantor or non-grantor, affecting who reports income annually. Distributions to "skip persons" may trigger GST if exemption was not properly allocated. State perpetuities statutes and decanting laws also shape duration and flexibility, making careful drafting and allocation essential.

During implementation, the estate attorney allocates GST exemption on IRS gift or estate tax returns, while the advisor tracks exemption usage and trustee distribution patterns. CPAs monitor trust-level income taxes and beneficiary K-1s. Reviews confirm that later transfers, decantings, or changes in situs preserve GST protection. Proper administration keeps appreciation outside beneficiaries' estates across generations.