Monday, March 07, 2011

Dynasty Trusts Under Attack

Although unlikely to become law, President Obama has proposed a limit to tax-free "dynasty trusts" used by wealthy American taxpayers.

From The Wall Street Journal.com:

    The proposal, which first appeared a few weeks ago on a hit list of estate provisions in President Obama's 2012 budget, would limit tax-free "dynasty trusts" to 90 years.

    The chances of passage are practically zero this year, say experts. But taxpayers should know that the idea is in play—and act accordingly. As proposed, the change would apply to new trusts or additions of money to existing ones, but not to those already funded.

    Bottom line: If you are considering setting up a dynasty trust, move swiftly. "This proposal reinforces the other reasons for doing so," says Julie Kwon, a partner at McDermott, Will & Emery in Silicon Valley. Among them: the current generous terms of the estate and gift tax—a $5 million individual exemption and a top 35% rate, both of which are set to expire at the end of 2012.

    "We're encouraging people who want these trusts to set them up now," Ms. Kwon says.

    Dynasty trusts have gathered steam since the 1986 tax overhaul installed the current version of the "generation-skipping tax." This levy imposes taxes that would be avoided if taxpayers left assets to heirs who are more than one generation below.

    Example: Robert, a widower, has a net worth of $15 million and his heirs include children, grandchildren and great-grandchildren. If he leaves everything to his children and they in turn leave everything to theirs and so on, there could be an estate tax toll with each generation.

Read more here