‘Trust Tsunami’
McDowell’s sales pitch got far more attractive in the past few years, when Congress gave the idea an inadvertent boost.
“I call it the trust tsunami of 2012,” McDowell said.
The reason most Americans don’t have to worry about the estate tax -- fewer than one in 700 pay it -- is because Congress applies the tax, and related taxes on other transfers to heirs, only when a fortune exceeds certain thresholds. For complicated reasons, the amount that most people can place in dynasty trusts is usually limited to one of these exemptions, which was set at about $1 million throughout the 1990s. It’s the size of the glass into which a wealthy family can pour the wine.
Throughout the 2000’s, this exemption rose, and by 2011, it reached a record $5 million per individual. The temporary law was scheduled to expire after 2012, at which point it would revert to $1.4 million. Congress didn’t act to make the higher amount permanent until Jan. 1, 2013.
With the fate of the exemption uncertain, McDowell said his clients rushed to meet the deadline during the last few months of 2012, creating billions of dollars’ worth of new trusts. He had to turn away new customers, and hire retirees to handle the crush of paperwork. There were late nights and shortened Christmas vacations. By the end of the year, he said he’d added about 500 trusts to his rolls, more than twice the number in a typical year.
For the richest families, even a $5 million dynasty trust represents only a fraction of their fortunes, so lawyers have invented complicated strategies to squeeze bigger sums into the vehicles -- as much as $39 million, according to a presentation by McDowell’s firm published last year. Such aggressive maneuvers, once common, have become rare in recent years, McDowell said.
Office Space
McDowell’s firm now administers trusts worth $14 billion, according to its website, almost all of them originating in other states. An additional $75 billion is overseen by the offices downstairs, each of which is technically a separate trust company catering to just one family. The companies pay rent to McDowell for the office space, and fees for handling paperwork and administrative duties like filing tax returns; McDowell declined to comment on the price of these services. All of these are necessary steps if the families want to prove that the trusts are truly South Dakotan.
The tenants include companies like Carlson Family Trust Co., serving the Minnesota family behind Radisson and the TGI Friday’s restaurant chain, and JHN Trust Co., linked in state incorporation papers to the family of the late New York hedge fund pioneer Jack Nash. Other companies have ties to Thomas Peterffy, the Connecticut online-brokerage billionaire; the descendants of a namesake of the Dillon Read & Co. investment bank; and the heirs of a Peruvian sugar plantation, state filings show.