Disinterested Congress
President Barack Obama has called for closing the dynasty trust loophole in annual budget proposals, even though the change wouldn’t boost tax receipts under his administration. The impact of dynasty trusts on federal revenue is far in the future — though potentially enormous, said Lawrence Waggoner, a retired professor at University of Michigan Law School.
“The federal government won’t lose out for maybe 90 years, and maybe that’s why Congress is not terribly interested in the subject,” Waggoner said. “The longer they procrastinate, you have larger and larger amounts in perpetually tax-exempt trusts.”
One clue to how much wealthy families might save comes in McDowell’s 1993 article. Just $1 million invested in a dynasty trust, and earning 12 percent a year, would swell to $1.9 billion in 85 years, he wrote — compared with $488 million if the same trust was located in New York, subject to both state income taxes and the federal estate tax when it expired.
Beneficiaries must still pay personal income tax on distributions from these trusts, McDowell said. If a family runs out of heirs before a trust is exhausted, the leftovers are typically directed to a charity, he said.