Taxation & Estate Planning

90 Year Limit To Dynasty Trusts Proposed In 2012 Budget

By michael

If the estate planning lawyers you know are looking even more pallid than usual this morning, its likely because of this story in today’s WSJ:

A type of trust used by the wealthy to shelter assets from estate taxes for hundreds of years, or even forever, is under fire.

The proposal, which first appeared a few weeks ago on a hit list of estate provisions in President Obama’s 2012 budget, would limit tax-free “dynasty trusts” to 90 years.

[...]

Example: Robert, a widower, has a net worth of $15 million and his heirs include children, grandchildren and great-grandchildren. If he leaves everything to his children and they in turn leave everything to theirs and so on, there could be an estate tax toll with each generation.

Robert would like to put his entire estate into a trust and skip layers of tax. But if he does, the generation-skipping tax kicks in and replaces the lost taxes?except for an exempted amount, which is currently $5 million per individual or $10 million per married couple. That $5 million can be pumped up using discounts, life insurance and other leveraging techniques.

Dynasty trusts push that generation-skipping tax exemption to the max, putting the exempted amount beyond the reach of estate taxes for the life of the trust. That, in turn, means the heirs don’t have to “spend” their own exemptions on those assets. These trusts are now allowed in 23 states and the District of Columbia[.]

It looks next to impossible that this would actually happen this year but its at least interesting that the idea is on the table.

I tend to agree with the gentleman quoted in the article who pointed to the asset protection features of such trusts as being their most beneficial aspects and its unclear from the article how the proposed limitation may effect a creditor’s ability to get at the trust assets after the 90 years expires.  Impossible to say at this point what effect this proposed limitation may have on how frequently these trusts are used, so stay tuned.

Special thanks to Professors Beyer and Caron for their respective posts on this topic here and here.

Full post as published by The Ohio Trust & Estate Blog on March 07, 2011 (boomark / email).