A “dynasty trust” is a trust that is not limited by the rule against perpetuities (the “RAP”) and can therefore last for centuries or, in some states, forever. Florida’s statutory rule against perpetuities is found in F.S. § 689.225. This statute was amended in 2000 to allow dynasty trusts in Florida to remain in effect for up to 360 years, which effectively abolishes the RAP.
Estate planning Nirvana:
Dynasty trusts have received a lot of attention in recent years from trusts-and-estates practitioners. In a NYT article entitled Shifting Rules Add Luster to Trusts, the planning benefits of these types of trusts was described as follows:
“Dynasty trusts are tremendously attractive, because wealth builds up quickly when it can be passed on without paying estate taxes at each successive generation,” said Gideon Rothschild, a partner at Moses & Singer, a law firm in New York.
If a dynasty trust of roughly $1 million was established today, Mr. Rothschild figured, it would be worth $867.7 million after four generations, assuming that it grew 7 percent a year and nothing was spent. By contrast, it would be worth $35.6 million if the property was given outright to future generations and was subject each time to an estate tax of up to 55 percent.
Dynasty trusts have also been written about in the WSJ [click here].
Big business for bankers:
Dynasty trusts may be good estate planning, but are they big business for bankers? You better believe they are! Prof. Robert H. Sitkoff of Harvard Law School and Prof. Max M. Schanzenbach of the Northwestern University School of Law analyzed federal banking data and concluded that as of the end of 2003 roughly $100 billion in trust funds had shifted to U.S. states – like Florida – that abolished the RAP and are thus amenable to the creation of dynasty trusts. According to the authors, these new trust funds may translate into as much as $1 billion in yearly trustees’ fees.
The Sitkoff-Schanzenbach study was published in a 2005 Yale Law Journal article entitled Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes. Here’s an abstract of the article:
This Article presents the first empirical study of the domestic jurisdictional competition for trust funds. To allow donors to exploit a loophole in the federal estate tax, since 1986 a host of states have abolished the Rule Against Perpetuities as applied to interests in trust. To allow individuals to shield assets from creditors, since 1997 a handful of states have validated self-settled asset protection trusts. Based on reports to federal banking authorities, we find that, on average, through 2003 a state’s abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase) and increased its average trust account size by $200,000. By contrast, our assessment of validating self-settled asset protection trusts yielded indeterminate results. Our perpetuities findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. Interestingly, states that levied an income tax on trust funds attracted from out of state experienced no observable increase in trust business after abolishing the Rule. Because this finding implies that abolishing the Rule does not directly increase a state’s tax revenue, it bears on the study of jurisdictional competition. In spite of the lack of direct tax revenue from attracting trust business, the jurisdictional competition for trust funds is patently real and intense. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law.