How the Rich Use Trusts That Last Up to 1,000 Years to Save on Taxes

How the Rich Use Trusts That Last Up to 1,000 Years to Save on Taxes

  • Wealthy people can use trusts to support heirs, save on taxes, and protect assets from creditors.
  • Dynasty trusts can last for up to 1,000 years — about 40 generations — in Florida and other states.
  • These trusts could grow in popularity as Trump’s tax cuts approach their expiration date.

The average American inherits about $1,500 from their grandparents, according to an analysis by the Wharton School at the University of Pennsylvania. The super-rich, on the other hand, can pass millions on to their grandchildren.

And thanks to the relaxation of limits on generation-skipping trusts and tax cuts made under the Trump administration, the wealthy are also avoiding paying hefty wealth transfer taxes by leaving their wealth to their distant heirs. .

Some of America’s wealthiest families, such as the Pritzkers, owners of the Hyatt hotels, the Wrigleys of the chewing gum fortune, and the Bezos family, use generation-skipping trusts to preserve their wealth. So-called dynasty trusts allow wealthy taxpayers to support up to forty generations and only be subject to tax once.

According to Sandy Christopher, a partner at Withers Bergman, dynasty trusts have grown in popularity as the generation transfer tax exemption has skyrocketed. Better known as GST, the tax aims to prevent families from avoiding estate tax by making gifts to grandchildren or another relative at least two generations younger than their children.

In 1986, the exemption was $1 million. Thanks to tax cuts made in 2017, it now equates to the federal estate and gift tax exemption of $12.92 million per individual and $25.84 million per married couple.

“As you have higher exemptions, it becomes much more meaningful to create a domain that can last as long as possible,” Christopher told Insider. “The generation-skipping tax exemption is very, very powerful for people making large gifts, creating trusts and setting up estate structures.”

The tax exemption will be cut in half at the end of 2025. Some wealthy families are delaying establishing dynasty trusts in the hope that new laws will extend the tax cut, which depends on the makeup of Congress, the tax strategist of BNY Mellon Jere Doyle tells Insider. Customers can rush to create dynasty trusts before the exemption ends if that seems unlikely.

This is how dynasty trusts work

The dynasty trust refers to the longevity of the trust rather than a specific type of trust, but here’s how they generally work.

Historically, trusts could only last for 21 years after the death of a beneficiary living at the time the trust was created. This rule against perpetuities dates back to 17th century England.

But over the past four decades, more than half of the states in the United States have either repealed this common law or greatly expanded the trust limits, allowing dynasty trusts to last for up to 1,000 years in states. like Florida and Wyoming. In Delaware, trusts can last indefinitely, although some restrictions include a time limit on real estate held in trust.

The duration of the trust is predetermined when it is created. Because dynasty trusts are long term, a corporate trustee is usually appointed, such as a bank or other financial institution like JPMorgan or Northern Trust.

The value of the trust when it is set up is subject to GST, which is a flat tax of 40% on top of the exemption. There are few limits to funding a dynasty trust, but it is best to use income-generating assets that are expected to increase in value, such as a family business.

The heirs do not fully own the assets but are entitled to receive income from the trust, which is subject to income tax but not GST. In the case of real estate, the heirs hold a life estate, which means that they have no ownership rights, but they have the right to live on the property and receive the profits from it until their death.

Even if the trust lasts for centuries and its assets appreciate exponentially, the generation skip tax is only paid once. Whatever assets remain, they revert to the ultimate heirs and count as part of their taxable estate.

It is difficult to predict the tax savings of a trust designed to last for decades or centuries, as tax laws will likely change. But Northern Trust estimated that if you bequeath $12.92 million and the family pays transfer tax in each successive generation over 75 years, the fortune will reach $108.4 million, assuming an after-tax rate of return. by 5%. Using a Delaware dynasty trust to avoid transfer taxes, the assets would be $501.7 million, or almost $400 million more.

Tax savings aren’t the only benefit

Most of Christopher’s clients are not interested in preserving their wealth in perpetuity.

“When you really talk to people, they don’t really think about it in terms of period,” Christopher said. “They have short-term or short-term concerns about their family.”

They are usually attracted to dynasty trusts to keep businesses within their family and protect assets from creditors. Thanks to an 1875 Supreme Court case, life estates are protected from creditors if the trust has a spendthrift clause. Dynasty trust assets are also protected in the event of a divorce.

Even for longtime lawyers like Doyle, the idea of ​​a trust that lasts 40 generations is mind-boggling.

“I just can’t imagine anything lasting a thousand years,” he told Insider.

Doyle thinks 90 to 100 years is a lot for a trust and has advised clients against forming trusts that would last virtually forever.

“Maybe that sounds good from a tax planning perspective, but you also have to think about it in practical terms. Who will your grandchildren be? Who will your great-grandchildren be,” he said. . “It could be tons and tons of money, and these people will never be incentivized to work or do anything on their own, give back to society.”

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