PORTFOLIO

Dynasty Trusts (Portfolio 838)

Tax Management Portfolio, Dynasty Trusts, No. 838, examines the uses of and requirements applicable to trusts structured to have significantly long, often perpetual, duration.

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DESCRIPTION

Tax Management Portfolio, Dynasty Trusts, No. 838, examines the uses of and requirements applicable to trusts structured to have significantly long, often perpetual, duration. The portfolio analyzes the impact of state law and of income and inheritance estate taxes on such trusts, as well as the impact of federal income, gift, estate and generation-skipping transfer taxes.
As certain jurisdictions began to extend or even eliminate the rule against perpetuities, estate planning advisors began to recommend the implementation of trusts lasting as long as allowed by the rule against perpetuities or in perpetuity to their clients. These “dynasty” or perpetual trusts had particular appeal when established in jurisdictions imposing no state income tax on trusts. Illustrations of asset growth for such trusts over long periods of time presented the potential for substantial wealth accumulation. However, this potential, in and of itself, seems to have held little appeal for clients (at least judging by the dwindling number of articles on the subject in recent years).
Estate planners appear to be spending more time counseling their clients on issues involving developing responsibility in beneficiaries and making productive citizens out of them through incentive clauses in trusts, and so the time is right to reexamine the utility of the dynasty trust in the estate plan. This reexamination is not based on the potential for accumulation of wealth, but rather on the intangible benefits such a trust, if properly structured, can have on a family.
This Portfolio endeavors to assist the estate planning advisor in determining: (1) those circumstances in which a dynasty trust might be an appropriate tool in the estate plan; (2) the state law issues that can arise for such trusts; and (3) the tax consequences, particularly generation-skipping transfer tax consequences, in funding and maintaining such trusts. The Portfolio also contains suggestions for funding and drafting such trusts.
For a detailed discussion of the generation-skipping transfer tax, see 850 T.M., Generation-Skipping Transfer Tax.
This Portfolio may be cited as Cline, 838 T.M., Dynasty Trusts.


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AUTHORS

CHRISTOPHER P. CLINE, ESQ.
Christopher P. Cline, Wealth Management Director, Wells Fargo Bank; former partner, Holland & Knight; B.A., San Francisco State University, 1987; J.D., Hastings College of the Law, 1991; member of bar, Oregon and California; adjunct professor of law, Northwestern School of Law, Lewis & Clark College; Fellow, American College of Trust and Estate Counsel; contributor to Tax Management Estates, Gifts and Trusts Journal, Estate Planning, Probate and Property, and other professional publications.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. State Law Issues

Introductory Material

A. Trusts Generally

B. Situs and Domicile

1. Which Law Governs?

2. Changing Situs

3. Domicile

C. Rule Against Perpetuities

D. State Income Tax

E. State Inheritance or Estate Taxes

F. Fiduciary Investing

1. Background: The Restatement and the Prudent Investor Act

2. Prudent Investor Litigation – What Are the Boundaries of Diversification?

3. Should Large Concentrations Be Hedged?

4. Some Conclusions

G. Principal and Income Acts

1. Introduction

2. Power to Adjust

3. Power to Convert to a Unitrust

4. Problems with the UPIA

H. Multistate Practice Issues

I. Divorce

III. Federal Tax Issues

Introductory Material

A. Estate Tax

1. Sections 2036 and 2038

a. Retained Possessory and Income Interests

b. Powers over Income or Corpus

2. Section 2041: Powers of Appointment

3. Section 2042: Life Insurance

4. Section 2035: Pulling Back Released Controls

B. Gift Tax

C. Generation-Skipping Transfer Tax

1. Some Definitions

2. Application of the GST Tax

a. Exceptions to the GST Tax

b. Applying the GST Tax-Generally

c. Allocating GST Exemption

d. Application of the Tax to Direct Skips, Taxable Terminations and Distributions

D. Changes to Transfer Taxes Under EGTRRA

E. Fiduciary Income Tax

1. Taxation of Trusts

2. Grantor Trust Rules

a. Specific Code Provisions

b. Planning with the Grantor Trust Rules

IV. Planning Issues

Introductory Material

A. Defining the Purpose of the Trust

1. Family Values: The Family Mission Statement

2. Giving Family Members a “Leg Up”

3. The Dynasty Trust as Safety Net

4. Encouraging Philanthropy

5. Preserving the Family Business

B. Trustee Selection

1. Grantor or Beneficiary as Trustee

2. Trust Protector

3. Use of Trustee for State Law Purposes

V. Funding Issues

Introductory Material

A. Limitations – Gift, Estate and GST Tax Limits

B. Multiple-Party Funding

1. Use of Crummey Powers

a. Court and IRS Decisions

b. Trust Design in Light of 2041

c. Tax Consequences of Crummey Trusts

(1) Income Tax Consequences

(2) Estate and Gift Tax Consequences

(3) GST Tax Consequences

d. Planning Ideas Using Crummey Trusts

2. Spousal Trusts and the Reciprocal Trust Doctrine

C. Funding with Discounted Assets

D. Installment Sale to Grantor Trust

E. Life Insurance

VI. Drafting Issues

Introductory Material

A. Building in Flexibility

1. Powers of Appointment

2. Trustee Discretion

B. Incentive/Behavior Modification Provisions

C. Creating Multiple Trust System

1. Using Crummey Powers Effectively

2. Pot Trust vs. Separate Trusts

D. Extending Trust Durations

1. Lengthening Trusts in Rule Against Perpetuities Jurisdictions

2. Lengthening Existing Trusts


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Uniform Statutory Rule Against Perpetuities

Worksheet 2 Sample Dynasty Trust

Bibliography

OFFICIAL

Statutes, Acts and Authorities

Statutes:

Internal Revenue Code:

Treasury Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Treatises:

Periodicals:

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