Dynasty Trusts (Portfolio 838)

Description

Bloomberg Tax 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.

Table of Contents

I. Introduction
II. State Law Issues
III. Federal Tax Issues
IV. Planning Issues
V. Funding Issues
VI. Drafting Issues