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| Pay It Forward |
The Lure of Dynasty Trusts
Michael Sisk
12/01/2003
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A second popular technique is to sell a family business or limited partnership into a dynasty trust, typically at a 30 percent to 40 percent discount to the fair market price because it has no control over the company’s affairs. In return, the dynasty trust gives the grantor a promissory note that it pays off using the income generated by the business. This approach has an added advantage: You have created what is known as a "defective" trust, which means you are responsible for the trust’s income tax during your lifetime. This allows the trust to grow at an even faster rate.
Fees to set up and manage dynasty trusts vary. Stephen Heyl, vice president at McDonald Financial Group, a part of the Key Financial Network, says that managers typically charge fees from 0.5 percent to 1.25 percent of assets under management, depending on how much is managed, with a yearly minimum of $3,000 to $7,000.
Aside from fees, those considering dynasty trusts must weigh whether they are willing to undertake the complex task of setting one up—a challenge even attorneys and professional wealth advisers find daunting. Jonathan Koslow, the head of the trust and estate group at Skadden, Arps, Slate, Meagher & Flom, says, "The problem is often that the client doesn’t understand, the accountant doesn’t understand, and many estate lawyers don’t understand."
Koslow describes the "glaze-over point," when even clients who are willing to discuss the minutia of the legal documents reach their personal threshold. "They’ll give you their thoughts and say, ‘Now you draft it.’ But there are so many subchoices, you can’t do it without them. It’s rare to find clients who will roll up their sleeves. There are so many opportunities and nuances, and there’s only so much a client can deal with."
This ordeal is multiplied by the need to create a flexible trust that can stand the test of time. "A lot of flexibility can be built into the trust. It doesn’t have to be rigid," Aucutt explains. "Each successive generation can be given power to make adjustments for future generations…. The trustee needs to be able to gather the general values and objectives of the person who set up the trust, but have flexibility. That is an enormous challenge."
"Flexibility, flexibility, flexibility," intones Bruce Stone, a partner at Coral Gables, Fla.-based Goldman, Felcoski & Stone, who authored legislation adopted by the state legislature to extend the life of dynasty trusts within Florida to 360 years. "You better build in flexibility. Can you imagine if you were trying to administer a trust set up by George Washington or set up in Norman England?" Even something as seemingly straightforward as an educational trust could pose problems down the line, notes Heyl. "What classifies as an education worthy of disbursement? Does a community college count? A technical school? A license for massage therapy? What if in 100 years most people are going to trade schools?"
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