Obama’s Budget Proposal Would Limit Dynasty Trusts

Twenty three states and the District of Columbia realized that they could make money if they did away with the rule against perpetuities, a common-law principle that limits the life of trusts to approximately 90 years. By placing assets in these “dynasty trusts” that are exempt from the rule, wealthy individuals can maximize the benefits of their gift, estate, and GST tax exemptions, enabling their heirs to save their own exemptions on those assets for hundreds of years.

President Obama’s 2012 budget proposal includes a provision that would limit dynasty trusts to 90 years. Under the proposal, trusts could go on indefinitely, but the federal tax exemption would be removed after 90 years.

Opponents of dynasty trusts argue that they will create a new aristocracy with access to creditor-proof, tax-free wealth. Professor Ray Madoff of Boston College Law School also worries that dynasty trusts are just a decoy to line bankers’ pockets.

The bottom line is if you would like to set up a dynasty trust, move quickly. The proposed change would affect new trusts or additions of money, but not trusts that are already funded. This reinforces the other reasons for creating a dynasty trust sooner rather than later, including generous estate, gift, and GST tax exemptions and rates through 2012.

See Laura Saunders, Dynasty Trusts Under Attack, W.S.J., Mar. 5, 2011.

Special thanks to Jim Hillhouse (WealthCounsel), Paul Caron (Charles Hartsock Professor of Law, University of Cincinnati College of Law), and Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.