I consider myself fairly cynical about the Forty Years’ War Against the Middle Class, but I hadn’t previously heard of this particular strategem to help (some) Americans build an aristocracy:
… Congress is feeling pressure to deal with taxes on inherited wealth, which have fallen to zero this year thanks to lawmakers’ inaction. In the process, it should address the more pernicious problem of dynasty trusts.
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 In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.
Dynasty trusts can grow much larger than the $3.5 million exemption amount would suggest. A couple can, for example, put $7 million (their two $3.5 million exemptions) into a life insurance policy owned by the trust. They apply their exemption at the start, and the trust is forever free from taxes — even when, after the death of the second spouse, the life insurance policy pays off at $100 million. Alternatively, a trust can use the $7 million as seed money for a profitable business that the trust then owns.
An ordinary trust dissipates as money is distributed to the beneficiaries. But a dynasty trust can avoid this by discouraging outright distributions and instead encouraging trustees to buy, for the use of the beneficiaries, things like houses, artwork, airplanes and even businesses. Because the trust retains ownership, the assets can pass tax-free and creditor-proof to the next generation. Beneficiaries don’t pay taxes on the use of this property. In contrast, a worker whose employer provides housing or other benefits is taxed on those benefits.
But tax breaks are not the only special advantages that dynasty trusts provide. Even more troubling, they commonly include a “spendthrift clause,” which provides that trust assets cannot be reached by a beneficiary’s creditors. If a beneficiary causes a car accident, for example, the victim cannot be compensated with assets from the trust, even if they are the driver’s only resources. So beneficiaries are free to behave as recklessly as they like, knowing that their money is forever protected for themselves and their heirs…
Jonathan Swift sensibly asserted that his Struldbrugs, those born immortal but not ageless, were forbidden to own property:
As soon as they have completed the term of eighty years, they are looked on as dead in law; their heirs immediately succeed to their estates; only a small pittance is reserved for their support; and the poor ones are maintained at the public charge. After that period, they are held incapable of any employment of trust or profit; they cannot purchase lands, or take leases; neither are they allowed to be witnesses in any cause, either civil or criminal, not even for the decision of meets and bounds… Otherwise, as avarice is the necessary consequence of old age, those immortals would in time become proprietors of the whole nation, and engross the civil power, which, for want of abilities to manage, must end in the ruin of the public.
But to look on the lighter side, if our new “aristocracy” is successful in their long campaign to reduce America into a banana republic, at least we’ll have some properly feudal entertainment — the Grey Lady is pleased to report that jousting is making a comeback!