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 In the mid-1990s, however, many states repealed the perpetuities rule, and now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states.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!
General Stuck
Greasy lamb hocks, vats of Grog, and rescuing maidens in distress. Could be worse.
And now for something completely different.
KG
The Rule of Perpetuities was really made irrelevant by roll over trusts. Basically, you could amend (or just write it that way in the beginning) that when the trust expired, it rolled into a new trust. On top of that, in many states the rule had been extended to as long as 120 years, anyway.
Personally, I don’t mind assets passing from generation to generation without taxation. Plenty of other taxes are collected over the years (sales, property, income). That said, I also wouldn’t be opposed to an estate tax on large estates (say those more than $10m), but I think (key word) that the estate tax was hurting too many middle class (or upper middle class families) and was actually serving as something of a barrier to economic mobility.
Now, I think some rethinking of the laws governing the piercing of a trust is probably in order. In part because this is a bastardization of the spendthrift trust rules, which were really designed to protect beneficiaries from themselves. Basically, they were designed so that the screw up kid couldn’t go blow their money on blow and hookers by placing a trustee in charge of the purse strings. It really shouldn’t be used to save the fuck up from liability.
suzanne
As if my political day wasn’t shitty enough. GAWD. Can we just give fucking titles and knighthoods already and do away with all the pretense?! At least the British monarchy serve in the military or open charities and foundations and shit. Our monarchy goes to lesbian bondage shows *on someone else’s dime*.
In much less depressing news, the new puppeh has been dubbed Luna. Short for Lunatic.
John Cole
Why didn’t you people remind me about White Collar?
Omnes Omnibus
@John Cole: I, for one, thought you were cutting your lawn due to extreme crankiness inspired by previous threads. I don’t know what everyone else’s excuse is.
RPh
@KG: This has actually been a feature for years, even before the 1976 Estate Tax law change.
Even if we did not have the “exempt estate amount” we do today (or did prior to the expiration of the estate tax this year and its reviving next year) there have ALWAYS BEEN ways for the rich to pass on significant wealth w/o tax. See ILIT, “estate freeze” techniques, valuation discount, annual exclusion, etc.
Bottom line, just like on Wall St., there is always a smart lawyer and a way.
Bigger issue is the rich hiding income from the income tax while alive (legally & illegally). Look into the Cayman Islands or other tax havens for more.
The end result isn’t that big a deal (but for the obscenely wealthy) as hard work, intelligence, and guile are most often bred out a few generations after the accumulator is done.
Roger Moore
@KG:
I’m pretty sure you’re wrong, unless the mobility you’re talking about limiting is from rich to stinking rich. There are already enough loopholes that nobody’s children are going to go into the poorhouse because they lost their money to the estate tax. For example, life insurance policies are not included, so it’s possible to exempt huge amounts of money that way. There’s also the $12K/year gift exemption, which lets wealthy people pass on a lot of money tax free while they’re still alive. I would be a lot happier about raising the estate tax exemption if some of those loopholes were closed at the same time.
SIA
@suzanne:
Aw! Luna. Very nice. La Luna! I’m ignoring the lunatic comment. I’m sure she is no such thing! ;) (Though I have to admit her smile looks a tiny bit demented)
ETA: apologies for being OT, but I’m been flattened already today by the STATE OF THINGS and so going to read a vintage murder mystery. Bonne nuit.
demo woman
Oftensometimes I write comments on AJC Political Insider and today I wrote about teabaggers..I didn’t even respond to cap and trade because the racism comment just blew me away.. Since this is an open thread, I’ll share .. the new response is you are calling me a racistI’m still confused.. Where was the Tea Party when Bush had trillions of dollars in tax cuts? Where was the Tea Party when they passed a Prescription Plan for Medicare without paying for it? Where was the Tea Party when we fought two wars without paying for them. The Democratic Party did not pay for the stimulus plan because tax increases was the last thing the country needed when the economy was on the brink. Does the Tea Party only care about deficits when the Democrats are in control?
*
Voice O’Reason
July 13th, 2010
7:03 pm
JL, I hear that question a lot, and my answer is so: where were the revolutionaries in 1760? Where were the civil rights leaders in 1920? Just because the tea party only became active during the Obama administration does not make them racist. Some things take longer to come about, and there’s always a straw somewhere that will break the camels back, so to speak.
Also, if the economy is on the brink, and you say tax increases are the last thing we need, why then are so many Dems behind the cap and tax bill?
JL
July 13th, 2010
9:54 pm
Voice O’ Reason Did I mention racism? Wow, just wow.
Wapiti
And medical and education expenses are exempt as well, I believe. (Which combined could provide a huge advantage to a new adult.)
Roger Moore
@suzanne:
I thought that name was for cats who have moon shaped marks on their foreheads.
Warren Terra
@KG:
Umm, no. Not unless the trusts pay these taxes. The fact that taxes were paid on the road to accumulating the wealth is a bit irrelevant if the accumulated wealth, now transferred to a trust, is shielded from these taxes going forward. And didn’t you notice the part in the blockquote where it pointed out that if your company provides you with an apartment close to the office or with the use of a Ford Focus, you have to pay taxes on the market value as income – but if the trust provides you with the exclusive use of the fully-staffed Wayne Manor and employs Batman himself to chauffeur you around in the Batmobile, you don’t have to pay taxes?
I urge you to think harder. Last year, when we last had an estate tax (in 2010 we don’t; die quickly, rich folks!), the first $3.5 million of an estate were untaxed. If Congress does nothing, when the estate tax returns next year it will revert to its 2001 status, and the first million dollars of an estate will be untaxed. Twice that for a married couple. I saw someplace that only 0.6% of estates were subject to estate tax in 2009. I don’t know how many of those 0.6% liable estates were actually liable for a significant amount of tax, but I’m guessing that means that fewer than one in two hundred estates noticed the tax – that’s hardly the middle class. Contrary to what you say Victorian novels aside, inheritance has never been an important mechanism of economic mobility. If you’re the beneficiary of a taxable estate, you’re not likely the poster child for our society needing more economic mobility.
SiubhanDuinne
@Demo: Not sure you saw that I responded to your question about Dem AG in an earlier thread. Shorter me: Teilhet, definitely.
Brian J
Out of all the lies that the Republican party has told the public, the one about the estate tax hitting family farms is probably the most egregious. I don’t know about the numbers for small, family owned businesses–if I had to guess, however, I’d say it didn’t affect too many people–but from what I’ve seen, there’s never been a single recorded case of anyone losing a family farm because of the estate tax. People like Bill Gates, Sr. have looked high and low, only to come up short. And yet people still believe it, because they lie so consistently.
Brachiator
@KG:
Just not true. The key provisions of the current estate tax that Congress is squabbling over only affects about 5500 families, none of whom are remotely middle class.
The dynasty trust thing is an interesting feint by Republicans and bought-off Democrats (and the dynasty trust is a kind of life insurance trust, a special bird which is hard to set up correctly). There is no estate tax for 2010, so if you can marry a sugar daddy or sugar momma with a bum ticker, you might be rolling in gravy. But the old rules are set to come back in 2011 unless Congress acts, and the buzzards are all trying to make room at the carcass of tax law with all kinds of suggested modifications, almost all of which will benefit the wealthiest.
There is still an unlimited marital exclusion and healthy exclusions for children and others, so the middle class just ain’t being hit hard.
demo woman
@SiubhanDuinne: Thanks I did and that confirmed my suspicions.
WereBear
I should have such problems.
SiubhanDuinne
@demo woman, SIA: Barnes in the gub?
Adam Collyer
This isn’t really true. Any good law student knows that state legislatures abandoned this rule because no one actually knows how to apply it…
Our Bar Review lecturer for Wills gave us a strategy to deal with any Rule Against Perpetuities problem on the bar. She called it, “Conceding with Dignity.” That should tell you all you need to know.
jl
@Adam Collyer:
Sorry. I am not a lawyer, so your comment does not tell me all I need to know.
If no one knows how to apply it, why did the lecturer recommend that you concede? And if no one knows how to apply it, how did a group of laws recognizable under that concept survive since the 1600s?
Your comment could mean that it simply was difficult to evade, or that it was uninterpretable and that the courts always sided with the state tax board.
So, more explanation is needed for the nonlawyerly slow among us (that is, me).
Thanks.
El Cid
In the actual spirit of capitalist entrepreneurialism, inherited wealth ruins the societal aspiration that each generation, each individual use his or her own entrepreneurial and capitalist spirit to forge way in the market as best as he or she can.
Again, don’t let these shitbags ever say they believed in the principles of capitalism and the free market. They don’t. They’re vicious, parasitical, destructive shits.
Emma
Suzanne: Some of them actually do something valuable…. which can’t be said for most of the trust fund babies.
Kryptik
I suppose we should have Jonah Goldberg and Glenn Beck to thanks for enabling this crap:
Iowa billboard compares Obama to Hitler; draws criticism
demo woman
@SiubhanDuinne: yup
I was fortunate enough to hear him speak a few times and something that has always stayed with me was when he said “when kids go to school hungry, how do we expect them to learn.”
KG
@Warren Terra: I’m fairly certain that a trust has to pay sales taxes on things it buys, property taxes on real estate it owns, and income taxes on income it generates (I could be wrong on this last point as it’s not my area of expertise when it comes to law).
Here’s the other side of it, if your parents own a couple of homes, they could let you live in one of them without it being counted as income, same with them owning a car and it not counting as income. In theory, a trust should operate the same way. The basic principle behind them, unsurprisingly, has been corrupted into something else.
As for my point about economic mobility, if I’m wrong, I’m wrong. I’m going, really, on my own experience and that of those around me, which is a couple of generations removed from share cropping and exile.
suzanne
@SIA:
She’s actually very calm for a pup, but she reminds me a bit of Luna Lovegood, slightly ethereal and goofy. So the name works. :)
wengler
With even leftwing bloggers laughing at the Presidential aspirations of congressmen along the lines of Dennis Kucinich, I see very little action happening on the tax the rich front. Obama certainly doesn’t have the stomach for it. Nearly everyone he solicits advice from on a daily basis are millionaires. They want to help their friends and screw the rest.
If the war in Afghanistan is so important, why aren’t we raising taxes especially on those making over a million a year to pay for it? I mean we used to have this vague concept of paying for wars through revenues collected and the sale of war bonds for the money that couldn’t be produced right away.
WereBear
@suzanne: Calm for a pup?
Just wait. She is gathering her energies.
El Cid
@wengler:
What are you talking about? Wars are free. They pay for themselves, or something. And anyway, are you trying to kill the geese who have to break a few eggs to make a cake and have it too or some such?
burnspbesq
Income taxation of estates and trusts is pretty complicated, and although I took the course it’s not what I do every day, so I’m hesitant to claim expertise, but I remember enough to confidently assert that the analysis in that Times op-Ed is way oversimplified and mostly wrong.
First, if property passes at death without payment of estate tax, in most cases there is no step-up in basis, so any built-in gain will be taxed when the property is sold.
Second, as a general rule estates and trusts pay income tax at individual rates. They get a distributions deduction, but generally only if what is distributed is taxable in the hands of the beneficiary.
Yes, the income tax is full of holes, and some rich folks take full advantage of them. But a lot of people who aren’t even remotely rich cheat like crazy. Did you ever wonder why your local mini-mart has two cash registers, when there is never more than one person behind the counter?
And the most vociferous appoints of the estate tax were never ever in danger of being subject to it. My law school tax prof, Michael Graetz, wrote a great book about the bizarro politics of the estate tax.
Wilson Heath
A priest, a rabbi, and a Raquel Welch walk into the bar but they don’t know the rule against perpetuities so they fail it.
Any actual federal trust tax gurus in the room? Not my niche at all so I don’t know the full large print/small print of it, but I always figured IRC sec. 1(e) meant trust income got taxed fairly steeply, so that the main benefit of this sort of thing was avoiding estate tax including cascading estate taxes through generations. Is that at all right?
KG
@jl: the rule is rather strange. Basically, it goes like this:
The grant of an estate unless the interest must vest, if at all, no later than a fixed period of time (plus a period of gestation to cover a posthumous birth), traditionally 21 years, but that’s been played with, after the death of some person alive when the interest was created. But the question isn’t whether the interest actually does vest within the specific time, but if it possibly could – and by possibly I mean no matter how remote the possibility, it could happen. Under the model code, some states have decided that the vested interest must transfer within 90 years; other states just decide to wait and see if it vests and then figure out what to do with the time period expires.
That’s the most basic explanation of the rule. And when you actually introduce facts to the equation, it becomes something of a cluster fuck. At the end of the day, the practice of law is really about the details and how you apply general rules to specific fact patterns.
Cacti
It’s not that no one knows how to apply it. It’s just that the RAP is a hyper-technical pain in the ass even for legal professionals.
It’s difficult to explain to lay persons because understanding how it works requires some foundational knowledge of types of Estates in Land/Future Interests in Land.
burnspbesq
I understood the Rule Against Perpetuities for exactly five days: two for the New Jersey bar, and three for the California bar.
KG
@burnspbesq: I learned it long enough to take a property final, I gambled that it wouldn’t be on the Bar Exam when I took it.
S. cerevisiae
I know how to hunt – I will eat them before they have a chance to eat me.
Adam Collyer
@KG:
This is an excellent shorthand description. It’s also nearly impossible for someone who is relatively inexperienced to figure out which person the “life in being”/”measuring life” actually is. In other words…
It’s one of those situations where you either “get it” instinctively, or you don’t. For those of us who won’t be practicing estate planning and the like, this is a rule where you understand the definition, ham-handedly apply it on an essay to pick up some points, and move on.
But I apologize. It was an awful joke, and the standard for this profession is pretty low. But I do know there are some lawyers who reads BJ, so it was worth a shot. I hope the others have been more helpful.
Omnes Omnibus
@Adam Collyer: And all of this without discussing the fertile octogenarian….
Mr Furious
We can all rest easy knowing George Steinbrener’s children will keep the family farm (system).
burnspbesq
Jeezus. College classmate of mine is on the cover of the new issue of Fortune magazine – for being in the middle of an insider-trading scandal. He is the last fucking guy on earth I would expect to be wrapped up in something like that.
I have no idea what to think.
Hope he’s got a good lawyer.
Adam Collyer
@Omnes Omnibus:
I dropped dead in my chair from that comment.
Debating what’s worse right now – commercial paper or RAP.
Brachiator
@burnspbesq:
Yeah, the Times article is pretty crappy, and there is no excuse for this. Maybe they laid off their better business reporters.
Taxation of estates and trusts are two separate things. There are many types of trusts, and the income of the trust can be taxed at the trust level, or income can be distributed to beneficiaries and included in their individual tax returns (and this is still an oversimplification). It’s another oversimplification, but trusts can be taxed at a higher rate than individuals.
The top marginal rate for income taxed at the trust level is 35% of taxable income over 11,150. For individuals, the top marginal rate is 35% of taxable income over 372,950. The thing is, though, that the calculation of a trust’s taxable income can be very complicated.
suzanne
@WereBear:
Well, it *is* 116 degrees today. Only the masochistic and insane would be rarin’ to go. She’s very playful (but not destructive) inside, so I expect when the weather calms down that she’ll be just as energetic outside.
Citizen_X
Actually, that’s a pretty good description of corporate power today.
Cacti
@Omnes Omnibus:
Or the Unborn Widow.
Or the Magic Gravel Pit.
Steeplejack
Just when I think things can’t get any weirder, along comes something like this–“dynasty trusts.”
Next thing you know some coworker will approach me at the Big Box Bookstore to enroll in the cool new life insurance plan–a tontine. Last one alive wins!
JasonF
Ah, the Fertile Octogenarian and the Unborn Widow. That brings back the memories. My property teacher’s area of specialty was actually medieval English law, so all this stuff was actually newfangled as far as he was concerned. Property was a 20-week (two quarter) course at my school and I think we probably spent seven or eight weeks on fees simple and life estates and the like. I still remember him lecturing us that if we were ever to refer to the Rule in Shelley’s Case as “Shelley’s Rule,” we would look foolish.
jetan
Ah, the good old days. I don’t recall my property professor ever mentioning that all this stuff would be legislated into irrelevancy before torturing me with the unborn widow and The Rule In Shelley’s Case.
Brian J
@Brachiator:
It’s an opinion piece by a law school professor, not a news article in the business section.
Barry
@KG: “Personally, I don’t mind assets passing from generation to generation without taxation. Plenty of other taxes are collected over the years (sales, property, income). That said, I also wouldn’t be opposed to an estate tax on large estates (say those more than $10m), but I think (key word) that the estate tax was hurting too many middle class (or upper middle class families) and was actually serving as something of a barrier to economic mobility.”
when I first became aware of the fuss over the estate tax, it kicked in on that portion of the estate over $500,000, with several ways to partially shield assets (e.g., one can make tax-free gifts of $10K/year to relatives, meaning that the typical estate could dispense a few to several $10,000’s/year to children and grandchildren).
By 2000, the threshold was $1 million.
The estate tax has not been a major issue for upper middle class families for quite some time now.
It *has* been an issue for estates where $1 million is petty cash; from what I’ve heard those families are the drivers behind abolishing it.
Wilson Heath
@Barry:
For 99.99%-ish of the population, the estate tax is/was a voluntary tax because of how readily it can be avoided. FLP interests, gift transfers, marital gift exemptions, trust mechanisms, and so forth. Trust & Estates lawyers need stimulus, too, and will also be on the breadlines if their services aren’t needed.
I believe it may already have been clear by about the time that the estate tax was rolled out that firms perform worse in the hands of the founder’s family than they perform in the hands of new management. So I don’t necessarily put a lot of stock in the importance of keeping the family business in the family. Don’t fans of economic efficiency as deity want assets in the hands that can best extract value from them?
Brachiator
@Brian J:
That’s part of the problem. It should have been a news story by a business reporter following up the linked news story in the op ed piece about the guy who died in 2010, leaving an estate worth $9 billion, but paying zero estate taxes, and Congress stumbling over proposed revisions to the estate tax.
The op-ed piece reads more like an ad for dynasty trusts pitched to the more affluent readers of the NY Times than it comes across as a deeper analysis of estate tax issues.