As we mentioned in our last post, dynasty trusts-trusts having no expiration date and no required minimum distributions-can be an invaluable tool for the accumulation of family wealth. Such trusts have come into greater use since 1986, when Congress overhauled the generation-skipping transfer tax. Since that time, a number of states have chosen to repeal their rule against perpetuities-which limited the ability to make gifts to remove descendants-or to otherwise modify the rule to be more flexible toward such gifts.
The popularity of dynasty trusts has increased in 2010 as well, due to the increased gift and estate tax exemption amounts currently in effect. Many individuals are using the trusts to take advantage of the increase gift and estate tax exemptions to fund the trusts.
Not every state allows dynasty trusts, and some are more favorable than others toward them. In New York, which still has a rule against perpetuities, trusts are limited in that they may not last longer than 21 years beyond the lifetime of anybody alive at the time the trust is established. In Connecticut, trusts may last the greater of either 90 years or 21 years in excess of the lifetime of any individual currently alive.
Delaware is a popular state in which to set up dynasty trusts, because it offers a number of advantages to doing so. Most dynasty trusts set up in Delaware by individuals living out of state don’t owe state income or capital gains taxes on accumulations to trust assets. Such taxes, usually, are paid only when there are distributions from the trust. In most states, undistributed gains and income in trusts are taxed.
Anybody can set up a dynasty trust, as there is no minimum amount required to fund the trust. The cost of setting up such a trust generally ranges from $3,000 to $30,000.
Source: Bloomberg, “Dynasty Trusts Let U.S. Wealthy Duck Estate, Gift Taxes Forever,” Elizabeth Ody, 28 July 2011.