President Obama’s proposed budget, released a few weeks ago, contained several proposals for the future of the estate tax and estate planning at large.  While these suggestions don’t carry any legislative weight, but taxpayers would do well to pay attention.  At the very least, these proposals mean the idea are in play, they are gaining traction, and in estate planning it pays to plan long term.

Of particular note among is the proposal to limit so-called dynasty trusts to 90 years.  Twenty-three states, including Illinois, currently allow dynasty trusts and at present they can, conceivably, last forever.  These trusts are designed to preserve a portion of an estate, up to the lifetime exemption for the generation skipping tax, from taxation.

If you left all your wealth to your children and they left theirs to their children and so on, each generation would incur estate tax.  If you leave your wealth to your grandchildren or great-grandchildren, you skip a generation and thus a layer of estate tax, but the generation skipping tax (GST) kicks in to make up the difference.  Currently there is a lifetime exemption for the GST, $5 million for individuals and $10 million for couples.  A dynasty trust persists across generations, allowing your descendants to access the protected wealth without having to use their own GST exemption.

The administration has proposed that dynasty trusts be capped at 90 years.  Specifically, it is proposed that the GST exemption expire after 90 years.

The chances of any such repeal passing this year are not great, but the window may still be closing on the immortal dynasty trust.  The conditions for the estate tax and the GST, as shaped by the 2010 Tax Relief Act, are favorable.  They are scheduled to sunset at the end of next year.

For more information on dynasty trusts, the generation skipping tax, or other estate planning issues and concerns, contact Horowitz & Weinstein.

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