A proposal that first appeared in the Obama administration’s failed 2012 budget proposal seeks to override existing state laws and limit the terms of cascading or “dynasty” trusts to 90 years. This proposal didn’t make it into the “Fiscal Cliff” legislation, but might resurface again in 2013.
Although there can be no guarantees, any new federal law along those lines probably would treat existing dynasty trusts as grandfathered, and so exempt from this term limitation. However, if gifts were made to such trusts after the effective date of a trust term limitation law, a result might be that the trust would lose its grandfathered status. This already happens with certain grandfathered trusts (those settled before September 25, 1985) with respect to the generation-skipping transfer (GST) tax.
Or, a contribution after the effective date might cause the trust to be divided into a “dynasty share” and a “limited-term share.”
Many of my clients (and many, many people who aren’t my clients yet) have already-existing life insurance trusts (ILITs) to which they contribute annually. Many of these trusts are 100% exempt from the generation-skipping transfer tax. Those folks, to the extent possible and practicable, should consider using some of their lifetime exemption to “front-loading” their gifts to such GST exempt ILITs. Just in case.