Private Foundations and Estate Tax

To the Editor:

Little attention has been given to the economic impact that eliminating the estate tax would have on the future creation of private foundations and the consequences for charities in general.

A generation-skipping transfer tax was enacted in 1986 to avoid the use of a favorite tool of estate planners: trusts that could last for several generations, during which time trust assets would be exempt from death taxes.

Recently, however, a number of states have abolished the rule against perpetual trusts. In theory, it is now possible to have trusts that last forever. Some estate planners are suggesting to their clients that they use these trusts — commonly called dynasty trusts — to take advantage of the new state laws.

Under current law, contributions to these trusts are in effect limited to $1-million per donor, adjusted for inflation. Abolition of the estate tax would allow unlimited amounts of wealth to be transferred at death into dynasty trusts, enriching beneficiaries forever.

Abolishing the estate tax would provide a compelling reason for people of great wealth to transfer their assets to dynasty trusts even before death, rather than giving the money to their children outright, as a way to avoid the possibility that Congress might reimpose death taxes in the future.

Another danger exists: the possibility that these dynasty trusts could be moved to foreign tax havens as a way of avoiding U.S. taxation of any kind.

Currently, estate taxes greatly encourage wealthy individuals to leave their estates to private foundations and other charities. Assets not left to charity are taxed at a rate of 55 percent if left to children, and up to 80 percent if placed in trusts for the benefit of grandchildren or more remote descendants.

But if the estate tax is abolished, the advantages of leaving immense wealth to dynasty trusts instead of to charity would become far more significant than is the case now. Unlike private foundations, dynasty trusts can have noncharitable beneficiaries, including family members, as well as charitable ones. And dynasty trusts can operate without limits on investments and self-dealing, a required minimum annual payout, and other rules that the law imposes on private foundations.

Furthermore, concerns arise about the effect on the country if vast wealth is concentrated in secret, perpetual trusts whose responsibilities, controls, and powers are divided among trustees, beneficiaries, and others.

The question remains whether we as a nation should give people who acquire immense wealth the power to control the future of that wealth forever. That, in essence, is the issue before Congress and the American people.

Frank L. Bixby
Retired Partner
Sidley & Austin
Chicago

The writer has served on the board of the Spencer Foundation, in Chicago, since 1967.