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TRUSTS AND ESTATES

OLR Research Report


June 15, 2010

 

2010-R-0250

DYNASTY TRUSTS

By: Christopher Reinhart, Chief Attorney

You asked about “dynasty trusts.”

SUMMARY

In recent years, a number of states have adopted laws on “dynasty trusts.” These laws repeal the rule against perpetuities, which limits how long a trust can continue into the future. Applications of the traditional rule against perpetuities usually limit a trust to a period of around 90 years. Laws on “dynasty trusts” either place no limit on the number of years a trust can continue or allow it to continue for a long period of time, such as 1,000 years.

According to a law review article, “A dynasty trust is an irrevocable trust intended to benefit successive generations of beneficiaries.” The article states that the goal of these trusts is to protect the assets from (1) federal transfer taxes (the federal gift tax, estate tax, and generation-skipping tax) for as long as possible while making the assets available for future generations and (2) a beneficiary's creditors (Greer, The Alaska Dynasty Trust, 28 Alaska L.Rev. 253 (2001)).

It appears that the District of Columbia and 22 states have adopted “dynasty trust” laws. In Connecticut, the duration of trusts is limited by a modified version of the traditional rule against perpetuities under the Uniform Statutory Rule Against Perpetuities. The legislature considered “dynasty trust” bills in several sessions. Most recently, in 2005, HB 6935 proposed allowing people to establish dynastic trusts to restrict the use, transfer, or ownership of property for up to 1,000 years under some circumstances. The Judiciary Committee voted the bill out of committee but it died on the House calendar.

RULE AGAINST PERPETUITIES AND CONNECTICUT LAW

The rule against perpetuities originated in English common law more than 400 years ago. Its purpose is to prevent property from being tied up and excluded from channels of commerce for long periods of time (sometimes referred to as “dead hand control”). It provides that a future interest in property must vest, if at all, within 21 years after the death of a person who was alive when the interest was created.

Connecticut adopted the Uniform Statutory Rule Against Perpetuities (USRAP) which modifies the common law rule, creating a vesting period of the later of (1) 90 years or (2) 21 years after the death of an individual alive at the time the interest was created (CGS 45a-490 et seq.).

The legislature has considered bills on “dynasty trusts.” Most recently, in 2005, HB 6935 proposed creating an Alternative Rule Against Perpetuities (ARAP), allowing people to establish dynastic trusts to restrict the use, transfer, or ownership of property for up to 1,000 years under some circumstances. The bill allowed people to (1) give others nonvested property interests (rights to property at some time in the future, also called “future interests”) and (2) specify ARAP's applicability in the document that creates the interests. The bill specified that a qualified election of ARAP made the USRAP inapplicable.

The Judiciary Committee voted the bill out of committee but it died on the House calendar. A copy of the File for this bill is attached.

STATES ALLOWING DYNASTY TRUSTS

It appears that the District of Columbia and the following 22 states have adopted “dynasty trust” laws: Alaska, Arizona, Colorado, Delaware, Florida, Idaho, Illinois, Maine, Maryland, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, Ohio, Pennsylvania, Rhode Island, South Dakota, Utah, Virginia, Wisconsin, and Wyoming.

According to a law review article, most scholars believe that changes to federal tax law in 1986, the enactment of the generation skipping transfer (GST) tax, started the movement to abolish the rule against perpetuities in order to gain tax advantages for long-term trusts. Others

believe that the donors' preference for control was the reason for this movement, rather than tax considerations (Shanzenbach and Sitkoff, Perpetuities or Taxes? Explaining the Rise of the Perpetual Trust, 27 Cardozo Law Review 2465 (2006)).

Imposing the generation-skipping transfer (GST) tax meant that property could not pass in a trust from one generation to the next without a tax. For example, if a trust gives a child an interest in property for his or her lifetime and it avoids the federal estate tax when it passes to the next generation at the child's death, a generation-skipping tax is due.

In the past, the law exempted a certain amount of money from the GST tax and that amount could be placed in a “dynasty trust” to grow exempt from taxes. The GST expired at the end of 2009 but, unless Congress acts, it will return in 2011 with a $1,000,000 exemption.

According to the law review article, legislative histories and media coverage indicate that the enactment of “dynasty trust” laws was driven by competition for trust fund business.

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