4. Drafting Considerations Funding the Trust Administering the Trust Allocating GST Exemption to the Trust 18 8.

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1 Table of Contents Page * I. INTRODUCTION A. Background B. Advisability of Creating Perpetual Trusts C. Reasons to Create Perpetual Trusts D. Reasons Not to Create Perpetual Trusts 2 E. Analysis 3 C. The 200 Tax Act. Background 2. Estate Tax 3. GST Tax 4. Gift Tax 7 5. Carryover Basis 7. Old System Restored 7 II. PERPETUAL DYNASTY TRUSTS A. Introduction. Background 2. Scope 3. Observations B. The Exempt Dynasty Trust Planning the Trust 2 3. Don t Waste Exemption 2

2 4. Drafting Considerations 3 5. Funding the Trust 4. Administering the Trust 7 7. Allocating GST Exemption to the Trust. Consequences of a Late Allocation 9 9. Rectifying a Late Allocation Illustrations 24. Planning Options Involving a Spouse Modifying the Trust 2 C. The Grandfathered Dynasty Trust Exercising a Limited Power of Appointment Tips for Exercising a Limited Power of Appointment Exercising a General Power of Appointment Modifying the Trust 3 D. The Nonexempt Dynasty Trust Tax Advantages of Leaving Nonexempt Assets Outright Tax Advantages of Keeping Nonexempt Assets in Trust Choosing Between the Federal Estate Tax and the GST Tax 4 E. Federal Income-Tax Implications of Dynasty Trusts 42 F. Choosing the Jurisdiction for the Dynasty Trust 43 G. Introduction

3 43 H. Carry Out Objectives 49 I. Maximize Trust Duration 50 J. Minimize State Tax 5 K. Maximize Investment Return 72 L. Authorize Division of Responsibilities 73 M. Maximize Asset Protection 74 N. Minimize Administrative Costs 75 O. Preserve Confidentiality 75 P. Offer Power to Adjust or Unitrust Statute 75 Q. Provide Appropriate Allocation Rules 7 R. Provide Appropriate Judicial Relief 7 S. Ethical and Practical Concerns When Creating a Trust in Another Jurisdiction 7 G. Moving a Dynasty Trust to a More Favorable Jurisdiction 2. Determining Whether the Trust Can and Should Be Moved 3. Moving to Carry Out Client s Objectives or to Facilitate Amendment or Termination of a Trust 4. Moving to Create a Perpetual Trust 5. Moving to Avoid State Income or Intangible Tax. Moving to Provide More Investment Flexibility 9 7. Moving to Avoid Accounting Requirements and Administrative Costs 9. Moving to Convert to a Total-Return Unitrust

4 90 9. Federal Transfer-Tax Consequences of Moving 90 H. Delaware Tax-Trap Implications of Dynasty Trusts History 9 3. Analysis The Murphy Case Application to Nonexempt Dynasty Trusts 97. Application to Exempt Dynasty Trusts 9 I. Dynasty Trusts for Nonresident Aliens 0. Federal Gift- and Estate-Tax Rules 0 2. GST-Tax Rules Property Situs J. Drafting the Dynasty Trust 2. Drafting Decisions 3. Adding Flexibility 05 Appendix A Exempt Dynasty Trust Form... 0 Appendix B Traditional Exempt Dynasty Trust Illustrations Appendix C Charitable-Lead Unitrust Illustrations Appendix D Bases of State Taxation of Income of Nongrantor Trusts PLANNING WITH PERPETUAL DYNASTY TRUSTS By

5 Richard W. Nenno Wilmington Trust Company Rodney Square North 00 North Market Street Wilmington, DE Tel: (302) 5-3 Fax: (302) 5-9 I. INTRODUCTION A. Background The final years of the twentieth century brought many new concepts to trust law. In this paper, I will cover one of these major developments the perpetual dynasty trust. B. Advisability of Creating Perpetual Trusts. Reasons to Create Perpetual Trusts An individual might create a perpetual trust for one or more of the following reasons: a. To save federal transfer taxes; b. To save federal, state, and local income taxes or state or local intangible taxes; c. To provide investment management; d. To protect assets from beneficiaries creditors; e. To protect assets in divorce proceedings involving a beneficiary;

6 f. To protect a beneficiary from improvidence or designing persons; g. To manage assets for a minor or handicapped child or for someone who becomes disabled due to illness or old age; h. To encourage a beneficiary to act in desired ways (e.g., by providing funds only if the beneficiary earns a certain amount of income, gets married, or has children); i. To discourage a beneficiary from acting in undesirable ways (e.g., by providing funds only if the beneficiary is not addicted to drugs or alcohol); j. To preserve the identity of separate assets in community-property states and to preserve the identity of community property in common-law jurisdictions; k. To prevent assets (e.g., stock in a close corporation) from being encumbered or sold; l. To consolidate voting interests in closely held entities without having to deal with voting-trust restrictions; or m. By structuring the trust as a grantor trust for federal income-tax purposes, to enable individuals in an older generation to pay income taxes on assets that benefit individuals in a younger generation free of federal gift tax. 2. Reasons Not to Create Perpetual Trusts An individual might not create a perpetual trust because he or she: a. Does not have enough money to create one; b. Does not obtain estate-planning advice and does not otherwise learn about trusts;