Many of the biggest beneficiaries of President Donald Trump’s tax overhaul haven’t even been born yet.
The new law doubles the amount that can be passed to heirs without worrying about estate and gift taxes, to about $22 million for a married couple. But the thresholds are in place only until 2025, and the ultra-rich are turning to a key tool—the dynasty trust—to secure the financial futures of their grandchildren, great-grandchildren and beyond.
“For the mega wealthy, it’s really a window of opportunity that’s limited,” said Joan Antoniello, a principal at Mazars USA Wealth Advisors.
Dynasty trusts let the richest Americans protect and preserve wealth for generations, while minimizing tax bills. Treasury Secretary Steven Mnuchin appears to have used one prior to assuming his government role. They can be funded tax-free with assets up to the exemption limit, which was $10.98 million in 2017 for couples, even though complex tax-planning techniques can get around that threshold.
About a dozen of the nation’s top wealth planners say they’re seeing increased interest in the trusts as clients look to capitalize on the additional $11 million they can now easily shift over. Some families want to transfer money out of their estates into the trusts in case Democrats take back control of Congress and pull the limits back down before 2025, while others say it’s best to move assets before they appreciate even more.
Fewer than 2,000 families per year could be subject to the new estate tax limits, but billions of dollars are at stake. The richest 0.1 percent of families control a growing share of U.S. wealth, from an estimated 7 percent in 1978 to 22 percent in 2012, according to a University of California, Berkeley study. The net worth of the wealthy has zoomed even higher in recent years as values of stocks, real estate and private businesses have climbed.
There’s a further reason why those unaffected by the tax may still care about it: It illustrates how Trump’s claim that the rich wouldn’t gain at all under his tax plan is flat-out wrong.
Brad Dillon, a senior wealth planner at Brown Brothers Harriman, said he’s working with a family now to take advantage of the tax law changes. His clients, a married couple who founded a successful commodities import business, set up a regular trust for their three children in 2012. They used the prior, lower estate tax exemption to put a $10 million stake of their business in it—an asset that has since almost doubled in value.
Now, with an additional $11 million to play with, the family’s goal is to create a new dynasty trust to take care of grandchildren, who range from toddlers to 20-somethings, and of subsequent generations.
Here’s how it works: Dynasty trusts must be set up in one of the few states, such as South Dakota or Delaware, that allow for trusts without expiration dates, but you don’t have to live there to create one. They’re funded with cash, stocks or other assets, and structured so they pay each generation of heirs only some of the trust’s proceeds, while the rest of the money grows—free of estate and gift taxes.