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How to Delay Estate Taxes for Centuries

Would you like to leave money to descendants as distant from you as you are from the Pilgrims who landed at Plymouth Rock? It’s possible, if you set up a “Dynasty Trust.” The Obama administration, however, proposed restrictions on such trusts in its recently released 2012 budget.

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But experts agree that this proposal is unlikely to pass this year, and perhaps ever. Dynasty trusts can be used by the wealthy to put $5 million or more in assets beyond the reach of the estate tax for hundreds of years. They are especially attractive to many now that the estate tax is the most generous it has been in decades, with a $5 million per individual exemption and a 35% top rate – terms that will expire at the end of 2012.

Dynasty trusts became popular after the 1986 tax reform passed a new version of the “generation-skipping tax” Back then only three states (Wisconsin, South Dakota and Idaho) allowed them, according to a 2010 paper prepared for the by University of Michigan Law Professor Larry Waggoner for the American Law Institute (ALI).  Since 1986, another 22 states plus the District of Columbia have given dynasty trusts the green light.

How popular are they? Very, it seems. There are no current statistics, but a study cited by Mr. Waggoner found that roughly $100 billion in trust assets had flowed into states allowing Dynasty Trusts by 2003.

The ALI, a group that has promoted “clarification and simplification of the law” since 1923, urged last year that that dynasty trusts be restricted. Its report pointed out that “no trust drafted in 1650 or earlier could have contained provisions anticipating the possibility of adopted children, children of assisted reproduction, or children born to a surrogate mother . . . much less posthumously conceived children.”

Noting that a taxpayer could have 1.8 million descendents 450 years after setting up a trust, the report said, “The demographics of descent put the perpetual or near-perpetual trust on a collision course with core principles of trust administration.” The recordkeeping alone would be a big drain on trust assets.


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  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.