States seeking to attract trustee administration work within their state are enacting legislation allowing the duration of trusts to last hundreds of years, even in unlimited perpetuity in some cases. By contrast, prior to this legislative initiative, trusts could not exceed roughly 90 to 150 years (in very broad, general terms). The notion of these newly developing, long dynasty trusts is virtually ridiculous in my opinion. Why?
One. From an academic perspective, the idea of an expanded rule of perpetuities period that allows, as examples, a 360-year, or 500-year, or 1,000-year, or unlimited duration trust, might be appealing at first glance, particularly from a marketing perspective.
But in reality, the exponential growth in the downstream number of family beneficiaries covered by a dynasty trust over these extended periods (such as a trust covering “my descendants”) will eventually make the trust impractical to administer.
Immediately below is, in my view, a compelling statistical illustration of this exponential growth in the number of beneficiaries for one of these dynasty trusts. The trust administration responsibilities, the tax compliance reporting, etc., will also correspondingly increase exponentially.
Here are some numbers:
The National Conference of Commissioners on Uniform State Laws published a press release in 2000 stating that the average married couple will have 2.1 children. Under this assumption, a person who creates a trust today will in 150 years likely have more than 100 descendants (who are beneficiaries of the dynasty trust); after 250 years around 2,500 trust beneficiaries; and after 350 years 45,000 beneficiaries. After 500 years, the number of living beneficiaries could increase to 3.4 million.
You answer this question: Who benefits (especially financially) from a dynasty trust that is administered for thousands of beneficiaries?
Two. The second reason cutting against these exceptionally long dynasty trusts is that a GST trust (generation-skipping exemption trust) typically does not get the benefit of a stepped-up cost basis for the trust assets at the death of each generation level of beneficiaries. Over an extended duration of these GST dynasty trusts, the income tax expense from a loss of the stepped-up basis for the trust assets (for income tax purposes) can also exponentially become very costly.