The End of a Dynasty?

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Is the end of a dynasty coming? The WSJ recently reported that “Dynasty” trusts – or trusts that allow assets to be retained in trust for multiple generations without erosion by transfer tax – are on the President’s hit list. Often families will establish trust arrangements allowing them to transfer assets into trust, subject either to estate tax (if the transfer is at death) or gift tax (if the transfer is made while living). With careful drafting and allocation of Generation Skipping Transfer (GST) tax exemptions the transferred assets can be accessed by the beneficiaries if needed, but any amounts not actually withdrawn from the trust can continue for successive generations without repeated erosion by estate and gift tax. In addition, they often provide a high level of protection for family trust assets from the claims of a beneficiaries creditors, or predators.

Assuming each generation is about 30 years apart, this eliminates a 35%-55% tax on the value of the assets every 30 years.

These arrangements are often called “Generation Skipping Trusts” or “Dynasty Trusts” (usually a Generation Skipping Trust is held in trust for children and then distributed to grandchildren where a Dynasty trust is perpetual, but the terms are often used interchangeably). Most states limit the maximum duration of these types of trusts by an old rule known as the “Rule Against Perpetuities” however, several states, including Ohio, have no limit for properly drafted trusts.

Clients often get confused by the term “Generation Skipping” and think they need to skip over their children and often don’t like the connotation of “Dynasty” so I prefer to simply call them “Multi-generation Trusts” or family banks. Just like an IRA that allows for INCOME tax free compounding, these trusts allow for TRANSFER tax free compounding and are an essential part of any comprehensive family investment and wealth planning strategy. The Obama plan wants to limit the maximum term to 90 years. Still not bad, but longer is better.

This just reinforces the need to carefully uderstand the objectives and opportunities of a family’s wealth planning strategies.

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