The Iowa Legislature is considering legislation that will authorize an individual to create a trust that will last forever. If passed by the Senate (the House has passed it) the legislation will require such a trust if (i) the trustee is given the authority to sell assets of the trust or (ii) the trustee or another person is given the authority to terminate the trust. Many other states have authorized trusts to be created that will last forever. These trusts are called generation skipping trusts or dynasty trusts.
Although I think people should be given the option of creating a dynasty trust, I wonder how wise it would be to create a trust that exists for more than a few generations.
Of course, one of the benefits of these trusts is the possibility of avoiding estate tax in the successive generations. For example, if Mr. and Mrs. Smith put $10 million into a dynasty trust in 2012, their three children’s estates will each be $3.3 million lower than if they had inherited that money outright. Even at a 35% estate tax rate, that saves $3.5 million of taxes at the children’s level, or $1.5 million each. Add to that any appreciation in the assets, and the amount passing to the next generation without taxes can be very significant. If the fund grows in value by an average of only 2% more than the amount distributed to the beneficiaries each year, the money will approximately double every generation.
On the other hand, with each generation, the familiarity between the grantors and their descendants becomes more tenuous. I only remember one of my grandparents and certainly do not remember my great grandparents. My mom and dad, however, had great grandchildren who will remember them well. Once you get beyond the great-grandchildren’s generation, however, the donor is a stranger and the donor’s values will certainly be only a family legend at best.
A more interesting issue is that there may be a lot of beneficiaries as the trust continues. If each generation is defined as 25 years, and if each beneficiary has an average of 2.5 children, the number of beneficiaries after 250 years (which is longer than our country is old) would be almost 30,000. If the family is less prolific, and has only an average of 2 children, there would be only 1,500 beneficiaries or so after 250 years. And if there are 3 children per family, the number of beneficiaries in the 10th generation would be almost 60,000.
That’s enough to give me pause about recommending a ‘true’ perpetuities trust to my clients. On the other hand, potentially saving taxes in the next couple of generations is worth thinking about.
Tax Law Iowa - Davis Brown Law Firm 
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