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Dynasty Trusts v The Death Tax Repeal

Mike Godfrey,, New York

13 November 2000

To trust or not to trust? That is the question in this week of ultimate political uncertainty, and it arises for wealthy but ageing Americans who are eyeing Uncle Sam, arm-in-arm with Old Father Time, anticipating their share of the loot you have built up over 30 years of hard work and astute investment, helped along by the greatest bull market of all time.

The 106th Congress gave you some hope that the death tax would be repealed but there is now little or no chance that the repeal will get past the presidential veto during a lame duck session of Congress - it doesn't even form part of the composite tax-cutting bill which just might squeeze under the barrier. So you still face (or rather your family faces) estate tax of up to 55%. And the 107th Congress doesn't look much more hopeful: with a wafer-thin majority in the Senate, and some Republicans very doubtful about repeal, the GOP may not even reintroduce the repeal bill in the next Congress.

So it's back to the trust lawyers, who have been telling you for years to do something about it. Dynasty trusts, they say: take advantage of legislation in many states which allows you to create a trust in perpetuity. Wealthy families have always used family trusts but for many years they were limited by the old common law rule against perpetuities which limited the duration of a trust to eighty years or less (enough to span one generation but no more).

In recent years, states have begun to allow perpetuities: so far, 13 states have eliminated rules against perpetuities, making dynasty trusts possible. South Dakota, Wisconsin and Idaho were first, in 1983. Other states followed suit starting in 1996 — most recently New Jersey in 1999 and Rhode Island this year. Starting in 2001, Floridians will be able to create 360-year trusts. New York and Missouri, among others, are debating similar moves.

No federal gift taxes are owed when the trust is set up with assets valued at the amount protected by the one-time "federal unified credit," now $675,000 a person (ie the amount of your estate which will be exempt from estate tax when you die). The assets are not taxed in the donor's estate and can be free from state income taxes, depending on where the trust is set up. South Dakota and Delaware, among others, generally levy no tax. Finally, the trust can be structured so that assets are free from creditors' claims, ex-spouses or lawsuits against beneficiaries - this is known as an asset-protection trust. Putting a trust offshore is a further measure of asset protection, and most offshore jurisdictions allow trusts in perpetuity, but the IRS is if anything harsher nowadays on offshore assets than on domestic ones.

The dynasty trust sounds good, but what if the death tax is finally repealed? Future generations won't thank you for locking up assets to protect them against a tax that doesn't any longer exist. Some say that dynasty trusts increase the concentration of wealth, and can lead to litigation among descendants.

What to do? Wait, for a start. Wait until Bush and Gore have stopped dragging each other backwards through Floridian hedges. Then, perhaps, if Bush has won, you could take a punt on the repeal; if Gore wins, pick up the phone!


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