For those who went into business to create a corporate dynasty of sorts, they may get no better chance in their lifetime to pass on portions of that dynasty to future generations.
Trust and estate attorneys say a $5 million tax exemption via so-called dynasty trusts ”“ $10 million for couples ”“ is spurring major gifts in advance of the exemption”™s expiration at the end of this year.
At that point, the “generation skipping” exemption currently on the books is scheduled to revert to $1.4 million. Under current law, the top tax rate on gifts would balloon from 35 percent today to 55 percent, with an additional tax on estates worth more than $10 million.
It marks a major opportunity for a “sandwich” class of taxpayers, who possess sufficient wealth to pass along gifts amounting to seven figures, but whose beneficiaries stand to lose a lot under a heavy tax burden.
Dynasty trusts allow people to shield some assets from higher taxes by passing them onto grandchildren and their heirs. Last year, President Obama proposed limiting such dynasty trusts to a 90-year sunset, limiting the degree to which families can benefit from the “generation-skipping” tax first established in 1986 under President Ronald Reagan.
Connecticut does not allow dynasty trusts under state law, but several others do, including New Jersey, Delaware, and Florida. Under federal law residents of one state are allowed to establish dynasty trusts in another. Under Florida law, a dynasty trust expires after 360 years.
Through April, Connecticut gift and trust tax collections totaled just under $150 million, down by a third from the year before.
The threat of a major revision to dynasty trust law is resulting in a significant overhaul of estate planning, according to Todd Angkatavanich, an attorney with Withers Bergman, which has offices in Greenwich, New York City and New Haven. Angkatavanich said his firm and others are being flooded with queries amid continuing uncertainty over how Congress and the Obama administration will restructure dynasty trusts and other elements of the tax code related to trusts and estates.
Michael Carter, a managing partner with the Westport investment bank Carter Morse & Mathias, said the pending changes are not lost on business owners, but he has yet to see any major activity among his company”™s clientele.
“Growing political pressure to focus on the ”˜1 percent”™ and increasing pressures on federal and state budgets make it less likely that Congress will be able to once again extend the current favorable tax treatment of capital gains,” Carter Morse & Mathias wrote in a recent note to clients. “Unless Congress acts with purpose and is able to pass sweeping tax reforms immediately following the upcoming presidential election, owners can expect to pocket a lot less from their lifetime of work if they wait too long to act.”
