In America Builds an Aristocracy, an article published by the New York Times last summer, Professor Ray D. Madoff voices the opinion that “dynasty” trusts should be eliminated. These trusts, permitted under the laws of a number of states, are designed to keep wealth within a family for many generations, shielding trust assets from taxation and from creditors’ claims. In fact, these trusts have proliferated in recent years as more and more states have repealed or modified the traditional Rule Against Perpetuities.
The New York Times article points out a number of potential drawbacks that accompany allowing dynasty trusts, from a macro perspective. For example:
- Assets held in dynasty trusts have the potential to concentrate very large amounts of wealth – hundreds of millions of dollars – in the hands of a few families.
- The fact that dynasty trusts commonly include spendthrift clauses protecting trust assets from creditors means that beneficiaries can act recklessly with no real consequences.
- Assets in a dynasty trust can pass free of estate and GST taxes indefinitely.
President Obama agrees that the impact of dynasty trusts should be minimized. His proposed 2012 budget contains a provision that would limit the tax-sheltering of dynasty trusts to 90 years. Trusts which had already been established and funded would not be affected. The provision would apply to newly-formed trusts and to additional assets funded into existing trusts.
The provision is not likely to pass this year, but it might signal the eventual demise of one of the key benefits of the dynasty trust: estate and GST tax sheltering.
Now is the time to take advantage of the current law for your clients. Help your clients establish a dynasty trust to protect their descendants from estate taxation and creditors.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd Ste 240
San Diego, CA 92124