Future of the Federal Estate Tax

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In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.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

Forbes article by Deborah L. Jacobs: "Prepare for the Return of the Estate Tax"

Forbes has published Prepare for the Return of the Estate Tax, by Deborah L. Jacobs (lawyer, awarding winning journalist, author of Estate Planning Smarts).  The synopsis of the article provides, “The federal estate tax is coming back, while some state levies never went away. Act now to protect your family's assets.”

There are three parts to the synopsis:

[1] “The federal estate tax is coming back.”  Consensus among observes is that Congress will probably fail to reform the estate tax in 2010.  For example, in What's the Skinny on the Estate Tax?(LawEasy.com, May 2010), Martin M. Shenkman writes that “[a]t this stage, nothing may happen until several months into 2011 and then we may just get an exclusion of $1-$3 million with no inflation indexing and a rate of 45-55%.”

[2] “[S]ome state levies never went away.”  A June 9, 2010 Forbes article, by Ashlea Ebeling -- The State Estate Grab, 2010 Edition -- explains that “[l]ike the federal estate tax, state levies are in flux. As of mid-2010, 19 states imposed taxes on estates not left to a spouse or charity.”  Ebeling’s article provides a very useful, color-coded and interactive map of the United States that tells (a) whether a state has an estate, inheritance, estate and inheritance tax, or no state death taxes at all; and (b) where applicable, the exemption amount and top tax rate. 

[3] “Act now to protect your family's assets.”  If the estate tax “will rise from the ashes on Jan. 1, 2011,” as it is scheduled to do; then the time “to protect your family’s assets” is indeed “now.”  Jacobs explains why "[t]he prospect of a $1 million exemption means many more families need to plan for the federal tax:" "Tally up the value of a house, life insurance (if you are foolish enough to die owning it yourself), retirement and other accounts, and you may be surprised to find yours is one of them." 

Jacobs’s article discusses the actions people can take now to protect their estates:

• Review life insurance policy ownership.
• Put some assets in your own name.
• Maximize annual gifts.
• Fund college savings plans.
• Pay tuition and medical expenses.
• Convert to a Roth IRA.

Jacobs is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide.  This book would be profitably read by anyone who is curious about estate planning.  Estate Planning Smarts will empower you because it explains difficult concepts in accessible language and because it provides useful checklists at the end of chapters.

Jacobs keeps readers current between editions of her book by issuing updates that can be downloaded from her book's website http://www.estateplanningsmarts.com/ and tweeting at http://twitter.com/djworking.