In NY Times op-ed, Ray D. Madoff lambasts dynasty trusts: “America Builds an Aristocracy”

On July 9, 2010, the New York Times published America Builds an Aristocracy (free registration now required), by Ray D. Madoff.  Madoff begins by describing dynasty trusts as an estate planning technique:

These estate-planning instruments enable affluent people to provide their heirs with money and property largely free from taxes and immune to the claims of creditors. And rather than benefit only children and grandchildren, dynasty trusts provide for generations in perpetuity — truly creating an American aristocracy. . . .

This type of trust is new because until very recently most states had a “rule against perpetuities,” which limited the term of any family trust to about 90 years, after which time the family members would own the property outright. This rule derived from the idea that property is best controlled by the living.

In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.

Madoff closes her op-ed article with a proposal on how the federal government can limit dynasty trusts:

What can be done to eliminate these trusts? A state-level solution is unlikely, since all 50 states would need to act in unison. But Congress could fix the problem by limiting the generation-skipping-transfer exemption to trusts that last no longer than two generations. After that, beneficiaries of a trust should be subject to tax, like everyone else. Then America would not have to face the uncontrollable growth of a new aristocracy.

Commenting on Madoff’s op-ed, Martin Shenkman (estate planning attorney, New Jersey) had the following advice in Taxpayers Keep Fiddling While Tax Bennies are Burning (LawEasy.com, 7/12/10):

Dynasty Trusts: Really rich folk like to transfer assets to perpetual trusts in Delaware, Nevada, South Dakota or Alaska, among other states. These trusts can grow forever outside the estate, gift and GST tax regimes. They may also facilitate minimizing state income tax. Assets can remain out of the reach of creditors. A university profess[or] wrote an article in the July 12, 2010 New York Times lambasting these trusts as contributing unreasonably to the concentration of wealth in our country. Well, if you have big buckaroos and have done a dynasty trust (or two….) move now.

(Special thanks to Michael Hepner, a benefits professional, for alerting me to the comment by Shenkman.)

Comments

[Gerald Sutliff]

Great Wealth, like rain water, will find a way. What else is new?
Constant vigilance is required; beware of politicians who wear their masters clothes.

Some cliches remain timely.

[Steve Oshins, Estate Planning Attorney]

The NY Times article was ridiculous. If this kind of nonsense is being taught in the law schools, then our next wave of lawyers are in trouble. The dynasty trust is the most important tool in the estate planning attorney's arsenal. Why a law professor would say otherwise is beyond me. It illustrates a complete lack of understanding for how the dynasty trust is used and how it can be drafted. Go to www.oshins.com to get a more accurate description of dynasty trusts.