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Building Your Own Dynasty

It's getting easier to build a dynasty.

Undoing a centuries-old law that has helped stymie them, a wave of states are now allowing families to build their own economic empires by permitting so-called dynasty trusts that last forever. In these trusts -- also known as perpetual, legacy or generation-skipping trusts -- wealth stays in the family to benefit great-great-grandchildren and beyond. In the past, the law allowed such trusts to last only a few generations.

The trusts offer big tax savings and can help protect family money from creditors and ex-spouses. They're being heavily marketed by financial-services companies, which hanker after the perpetual-trust management fees and have lobbied hard for the legal changes. Franklin Resources Inc.'s Fiduciary Trust International unit, Merrill Lynch & Co., Wachovia Corp., Charles Schwab Corp.'s U.S. Trust unit and Northern Trust Corp., among others, boast Web pages describing the trusts' advantages for potential customers, or have created client newsletters and brochures that promote them.

TAKING A LONG VIEW Reasons to consider setting up a dynasty trust:   • To make sure your estate provides for many generations.   • To protect your family's assets from estate and generation- skipping taxes.   • To guard your family's wealth from creditors and ex-spouses.   • To pass along your values to heirs with incentive provisions.   WHERE TO BUILD YOUR DYNASTY At least 20 states permit trusts to last forever or for hundreds of years. See five that are particularly attractive places0 to set up long-term trusts.

Dynasty trusts make the most sense for people with at least $1.5 million in liquid assets, so donors can leave enough money to fund the trust while still having enough cash left over to live on.

One potential drawback is that a dynasty trust could lead to nasty family disputes as the number of heirs multiplies over time. "Litigators are salivating" as dynasty trusts grow in popularity, says John Scroggin, an estate attorney in Roswell, Ga. Further down the line, in 500 years, a trust set up by a couple with two children could have a staggering 3.4 million beneficiaries clamoring for funds, according to several dynasty-trust analyses.

Ultra-affluent families have long used labyrinthine networks of trusts to protect and build their assets for future generations. The Rockefeller family's roughly 140 living descendants are worth billions, in part because of the seven trusts set up in 1934 with $102 million by John D. Rockefeller Jr., the oil baron's son. The family now uses more than 100 trusts, including numerous charitable trusts, to manage its money.

Until recently, though, even the Rockefellers couldn't use dynasty trusts, as they were illegal in most states. Trusts were often subject to the "Rule Against Perpetuities," which effectively limited trust terms to about 90 to 120 years.

But starting in the late 1990s, a number of states moved to relax their trust term limits. Now, at least 18 states and jurisdictions -- including Delaware, Wisconsin, New Jersey, Illinois, Virginia and the District of Columbia -- allow trusts to last forever. And several states that impose term limits allow much longer durations. Wyoming and Utah, for instance, permit trusts to last 1,000 years, while Florida lets them carry on for 360 years.

Growth of Wealthy Families

At the same time, the number of families with a net worth high enough to make a dynasty trust worth setting up has grown. The number of U.S. individuals with at least $1 million in financial assets -- excluding residences -- jumped to 2.27 million last year from two million in 2002, a 14% increase, according to a recent report by Merrill Lynch and consulting firm Capgemini Group.

Stepped-up marketing has helped drive client interest, estate advisers say. Mr. Scroggin, the Roswell, Ga., lawyer, says that about 30% to 40% of his clients with taxable estates now have dynasty trusts, compared with about half that four years ago. "Long-term trusts are the heart of the company's wealth-management business," says Richard Nenno, trust counsel of Wilmington Trust Corp. in Wilmington, Del.

If structured properly, dynasty trusts allow a family's property to grow for generations, free of federal gift, estate and generation-skipping taxes, which can grab roughly half of a parent's wealth as money moves to another generation. Another advantage: Assets in the trusts -- which are irrevocable, meaning they generally can't be undone -- are generally protected from creditors in the case of lawsuits, bankruptcy or divorce. And although a trust that lasts about 90 years is plenty long for most people, some families don't want their trusts to dissolve at an arbitrary deadline and prefer the option of continuing a trust indefinitely.

In a typical dynasty trust, a grandparent transfers assets to a person or institution, the trustee, who holds and invests the money for beneficiaries -- the children, grandchildren, great-grandchildren and beyond. As long as money stays in the trust, it can pass from generation to generation without additional estate or generation-skipping taxes, allowing the trust to accumulate vast sums over time. After 100 years, a dynasty trust funded with $1 million could grow to $867.7 million, assuming a 7% annual growth rate, according to an analysis by Wilmington Trust.

There are many ways to fund a dynasty trust, including using life insurance or by selling interests in a business to the trust. One of the simplest ways is to make gifts to the trust of up to $1 million -- the current federal gift-tax exemption. That $1 million will appreciate during the rest of the grandparent's life and will be out of the estate. The grandparent can then leave more money to the trust at death.

There are some downsides, however. Dynasty trusts can spawn trust-fund babies, who might have less motivation to work if they know that they'll receive regular trust income. Also, as the number of beneficiaries grows over time, there's more of a chance for trust-fund disputes, like the fractious fight among the Pritzker descendants, heirs to an estimated $15 billion financial empire.

And although dynasty trusts save a bundle on taxes, they also can incur perpetual annual fees and expenses -- typically about 1% of assets under management -- which can cut into a trust's value over time. Many families draft dynasty trusts with co-trustees, using both a trust company and an individual, spelling out a process for choosing future trustees.

Once the trust is created, beneficiaries receive distributions from the trust. How much they receive, and when, is determined by the creator of the trust and set out in the trust document, and then carried out by the trustee. Some trusts, for instance, have tough incentive provisions, which means that heirs only get their share if they, say, finish college. Heirs must pay income taxes on their trust distributions. The trusts themselves are subject to federal and state income taxes.

Because dynasty trusts are intended to last for the long haul, advisers suggest making them as flexible as possible. That means including mechanisms to terminate or split the trusts as the number of heirs grows, as well as specifying how beneficiaries can switch trustees or amend the trust to take advantage of future tax laws. Last month the Treasury Department and the Internal Revenue Service issued proposed regulations that make it easier to split trusts into two or more separate trusts. That's important as the number of beneficiaries grows over time, since each heir has different interests that might be tough to manage in one trust.

Setting Up a Trust

To set up a dynasty trust, it's not necessary for families to live in a state that permits them. Only a trustee has to be located there -- and many trust companies have operations in Delaware, Florida or other states that welcome long-term trusts. Moreover, some of those states, including Florida and South Dakota, have other trust-friendly benefits, like no state income taxes and strong asset-protection laws.

Drafting a trust typically costs about $5,000 to $10,000 in attorney's fees, depending on the complexity of the document.

Steven J. Oshins, a Las Vegas estate-planning lawyer, drafts about 150 dynasty trusts a year. One of his clients, Maryanne Ingemanson, set up a dynasty trust in South Dakota several years ago to help pass the family's primary asset -- commercial real estate -- to her two children, six grandchildren and beyond.

The "high eight figure" trust should accumulate significantly over the years, says Ms. Ingemanson, of Incline Village, Nev. Without a trust, "after about two generations it is pretty much 100% gone. The trust is effectively keeping the assets that you have worked very hard to assemble from being confiscated in a couple of generations," she says.

Write to Rachel Emma Silverman at rachel.silverman@wsj.com