An ILIT terminates after the policy pays out. A dynasty trust in South Dakota can hold and compound assets for 1,000 years. Choosing between them is really choosing between a liquidity tool and a perpetual wealth engine.
Dynasty Trust
A dynasty trust holds assets across multiple generations by taking advantage of states like South Dakota, Nevada, or Delaware that have abolished the rule against perpetuities, allowing the trust to last up to 1,000 years in South Dakota. You fund it once using your lifetime gift tax exemption (currently $13.61 million per person in 2024), pay no estate tax on appreciation inside the trust, and skip GST tax across every generation the trust spans. Setup costs run $5,000 to $25,000 in legal fees depending on complexity, plus ongoing trustee fees of roughly 0.5% to 1% of assets annually. A dynasty trust fits families with significant investable assets, a long compounding horizon, and a desire to hold real estate, private equity, or business interests across generations rather than just an insurance payout. For a side-by-side look at how dynasty trusts stack up against other multigenerational structures, see Alternatives to Dynasty Trust: The Best Structures for Multi-Generational Wealth Transfer.
Irrevocable Life Insurance Trust (ILIT)
An ILIT owns a life insurance policy on the grantor, keeping the death benefit out of the taxable estate entirely. When the insured dies, the policy pays into the trust free of income tax and estate tax, and the trustee distributes proceeds to beneficiaries according to the trust terms. The ILIT works best when the goal is liquidity, specifically providing heirs with cash to pay estate taxes on an illiquid estate (a family business or farm) without forcing a sale. Legal drafting costs $2,000 to $8,000, and you fund premiums annually using Crummey notices to qualify contributions as present-interest gifts within your $18,000 annual exclusion per beneficiary. An ILIT does not compound investable assets across generations the way a dynasty trust does; once the policy pays out, the trust generally winds down.
Combining Both: ILIT Inside a Dynasty Trust
The two structures are not mutually exclusive. A dynasty trust can own a life insurance policy directly, capturing the death benefit inside the perpetual trust and then reinvesting those proceeds across generations without triggering estate tax at any point. This is effectively a hybrid: the dynasty trust acts as the irrevocable owner and beneficiary of the policy, and Crummey powers can still be drafted in to handle premium gifting. The added complexity raises legal fees to roughly $15,000 to $40,000 at setup, and you need a corporate trustee in a favorable dynasty state, but the structure gives you permanent, compounding, estate-tax-free wealth transfer with a liquidity event built in at death. Families with estates above $20 million and at least a 30-year planning horizon are the core candidates for this combined approach.
How to Choose Between Them
Pick an ILIT if your primary problem is estate liquidity or if your estate is mostly illiquid assets and you need a guaranteed, tax-free cash payout for heirs. Pick a dynasty trust if you have significant investable assets, business interests, or real estate you want to compound across generations without estate tax at each transfer. If your estate exceeds $20 million, your planning horizon is 30 or more years, and you want both compounding and liquidity, combine them. The single most important variable is whether your goal is a specific payout at death or the long-term, tax-free accumulation of a diversified asset pool across multiple generations.
Things people ask first.
Can a dynasty trust own a life insurance policy the same way an ILIT does?
Yes. A dynasty trust can be drafted to own and be the beneficiary of a life insurance policy, functioning like an ILIT inside a perpetual structure. The death benefit flows into the trust estate-tax-free and then continues compounding under the dynasty trust terms rather than being distributed and wound down.
Which states are best for a dynasty trust?
South Dakota allows dynasty trusts to last up to 1,000 years, has no state income tax on trust income, and has strong asset protection statutes. Nevada and Delaware are also common choices, each allowing perpetual or near-perpetual trusts with no state income tax, though South Dakota's combination of duration and privacy law is generally considered the strongest.
Do I need to live in South Dakota to use a South Dakota dynasty trust?
No. You can be domiciled anywhere in the United States and still establish a South Dakota dynasty trust, provided you use a qualified corporate trustee with a physical presence in South Dakota. The trust's governing law follows the state of administration, not the grantor's state of residence.
What is a Crummey notice and why does it matter for an ILIT?
A Crummey notice is a written notice sent to trust beneficiaries each time a contribution is made, giving them a short window (typically 30 days) to withdraw the gift. This formality converts the contribution into a present-interest gift, which qualifies for the annual gift tax exclusion of $18,000 per beneficiary in 2024. Without Crummey notices, premium payments into an ILIT would use your lifetime exemption instead.
What happens to an ILIT after the insured dies and the policy pays out?
The trustee receives the death benefit income-tax-free and distributes proceeds to beneficiaries according to the trust document. Most ILITs are designed to wind down after distribution. If the trust was drafted with ongoing terms, it can hold proceeds for a defined period, but it does not continue compounding across generations the way a dynasty trust does.
Is a dynasty trust or an ILIT better for avoiding the generation-skipping transfer (GST) tax?
A properly structured dynasty trust is the stronger GST tool because you allocate GST exemption at funding and then all future appreciation passes to grandchildren and beyond without further GST exposure, potentially for centuries. An ILIT avoids estate tax on the death benefit but still requires GST exemption allocation if it skips a generation, and the benefit ends when the policy pays out.
Ready to build the right structure for your estate?
The Offshore Playbook breaks down exactly how to fund a dynasty trust, how to layer an ILIT or PPLI policy inside it, which trustee jurisdictions to use, and how to do all of it without triggering estate or GST tax at any generation. This is where the implementation detail lives.
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