Trust Updates Archive
(September 28, 2010 --Chicago, IL) -- Perpetual dynasty trusts may look great on paper and result in tax savings, but as descendants multiply, the shear number of beneficiaries will cause these trusts to implode, according to fiduciary legal experts. While tax savings are touted as the reason for the increased use of these trusts, the real driver may be competition in the fiduciary and financial industries.
Dynasty trusts, also known as generation-skipping trusts (GSTs), pass assets to the trust donor’s grandchildren, rather than children. Since the children never take title to the assets, this effectively skips estate taxes for the children.
Until recently, dynasty trusts effectively terminated after 90 to 120 years because of state laws against trusts in perpetuity. Since the mid- 1990s, nearly half of all states have amended those laws. Some states have extended the term of dynasty trusts to several hundred years, while others have removed all limitations.
Professor Lawrence Waggoner, University of Michigan Law School, says that the lure of tax savings is blinding settlors. Waggoner says that traditionally settlors have been adverse to long-term dynasty trusts because of the “increasingly diminished genetic relationship” they have with each succeeding generation of beneficiaries.
The geometric growth in beneficiaries, Waggoner and others contend, will also make operating these trusts unmanageable.
Advocates of dynasty trusts insist that with careful drafting these trusts can be well managed for centuries. However, critics counter that since drafting issues drive most fiduciary lawsuits, the likelihood of future problems with dynasty trusts is very high.
Not for the Super Rich
Over the last 100 years, the most wealthy families utilized dynasty trusts to pass assets from generation to generation for as long as the law would allow. As a result, trusts created by many of industrialists of the late 19th and early 20th centuries have ended or soon will.
Today’s super wealthy are not the group most interested in or being targeted for perpetual or extra-long dynasty trusts.
The largest use of perpetual or long- term dynasty trusts, say tax advisers, is to leverage a settlor’s estate, gift, and generation-skipping transfer (GST) tax exemption. This results from a quirk in the tax law.
Fees Driving Growth
Critics contend that lucrative fees, not tax savings, is driving the increased use of long-term dynasty trusts.
According to an article in Financial Advisor magazine:
“For financial advisors, dynasty trusts can provide lucrative fees. Advisors can charge hourly fees as the liaison between other professionals to complete the estate plan. Dynasty trusts also can help an advisor to capture assets that would otherwise go to a bank trust department.”
In an increasingly competitive market, many banks and trust companies are also vying for this business. The most aggressive institutions appear to be smaller ones located in the 20 states that allow for long-term dynasty trusts.
A Northwestern University study found that some $100 billion in fiduciary assets have moved into personal trusts in the 20 states that allow for long-term dynasty trusts. However, only states that do not levy an income tax on trust income produced out of state saw increases in trust assets. States that levied trust income tax experienced no observable increase in these trusts.
For the complete article, see the current issue of Trust Regulatory News.
No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.
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