Dynasty Trusts Good For Economy and Democracy

A well-designed and well-managed dynasty trust is an engine of economic growth and stability, protects its beneficiaries from the vagaries and tyrannies of corporate and governmental managers, and enables the freedom of critical thought and honest conduct that is the essence of a republic.

Dynasty trusts can take many forms, but a common characteristic is that trust assets accumulate and are used for the benefit of trust beneficiaries free of estate taxes and free of generation-skipping transfer taxes for many generations, or even perpetually.

In an article published in the New York Times in July, 2010, Ray D. Madoff, a law professor at Boston College, warned that an increasing use of so-called dynasty trusts would create an American aristocracy. Americans prefer meritocracy over aristocracy, Madoff wrote, and he then proceeded to repeat some of the usual jargon-filled arguments against trusts without considering their societal benefits.

If Prof. Madoff intended to imply that the United States today is a meritocracy, then meritocracy must be a system that rewards its members based on their ability to extract wealth out of the economy, regardless of the social, moral and economic costs of their activities. It seems present-day meritocrats, the experts, are adept at pursuing recognition, superiority and money, but fall short on performing meritorious work. The pay of public school teachers is typically based on the number of college credits they accumulate, not on teaching performance. The dependence of professional politicians on donations and perquisites is well documented. The subservience of journalism and scholarship to prevailing popular thought and commercial considerations is an accepted, unfortunate fact. For example, legislators, government regulators and private-sector employees involved in deep-water oil drilling and the failed investment banking industry seemingly achieved professional success and were paid well, but caused great damage. After September 2001, politicians, academics, clergy and journalists failed to analyze critically the U.S. government’s policies and actions regarding passage of the Patriot Act, the occupations of Iraq and Afghanistan, the secret rendition of kidnapped prisoners, and the war against Islamic militants. But, they were well paid for their complacency and complicity. For decades, politicians, scholars, and journalists have shamelessly failed to debate openly the plausible idea that U.S. support of tyrannical regimes (e.g., Egypt, Jordan, Saudi Arabia) in the Middle East and U.S. support of the Zionist Israeli regime (which, as history shows, expelled native Arabs from Palestine in 1948, destroyed their homes, and expropriated their land) might be the real causes of aggression against the U.S. Instead of speaking, writing and acting for the public good, the pundits and puppets of conventional wisdom perpetrate myths that the U.S. is under attack because of the American way of life and Western ideals of liberty. Accordingly, the actions and omissions of the failed class of corporate-funded politicians and intellectuals-for-hire undermine the national security of the U.S. and the personal safety and liberty of its citizens. Yet, corporate and governmental paymasters regularly reward the unworthy conduct mentioned here with big paychecks and thereby maintain the compliance and conformity of the meritocrats. The dynamic of parasitic, subservient, mercenary behavior being rewarded with economic success might represent social Darwinism, but it takes the merit out of meritocracy.

A proliferation of dynasty trusts would enable an increasing number of citizens to act morally and responsibly because they would have an independent source of material support. One can only guess how many otherwise honest and intelligent people fail to act according to their conscience, or worse, act contrary to their values, because they fear retaliation from an employer or from a wealthy sponsor. Most people today have to earn a living, that is, they are not financially independent, and the more educated and specialized they become, the fewer job choices they have. For example, a climate researcher working in a government agency has very limited options to work in his field. If he is fired by his bureaucratic superior for publishing a politically unwelcome report, then he might soon be gathering shopping carts at the local supermarket parking lot and unable to support his family. The same is true, to a greater or less extent, for engineers, teachers, journalists, and just about everyone else who is an employee or who depends on public or private good will for his sustenance.

Of course, lots of good, honest work is being performed in society, but too little is done that actually challenges the vested interests of the selfish and profit-driven.

One could argue that many of the people who truthfully challenge self-serving myths and corrupt practices are supported directly or indirectly by independent sources of wealth. For example, the independent journalists and authors who succeed in exposing lies and corruption are often the benefactors of a few, enlightened wealthy individuals and their charitable foundations. They earn sponsorship through their merits, and arguably therefore are meritocrats. But, their financial support comes from privately accumulated and privately controlled wealth, not from taxes or popular commercial interests. In other words, a dynasty trust itself can be an independent source of funds for supporting important societal work that would never receive funding from the conventional establishment.

Consider how much more vibrant and truthful our public discourse would be, and how much more efficient and responsible our governments would be, if people could speak and act without needing to worry about being fired from their jobs and losing their material livelihood. More dynasty trusts would mean more people being insulated to at least some extent against the purely mercenary rules of economic Darwinism. Of course, dynasty trusts are no guarantee of moral, truthful, responsible behavior. On the other hand, the current circumstances in which corporate wealth and populist myths influence personal and professional decision-making make inefficient and corrupt social behavior inevitable.

Many of the so-called founding fathers of the American republic inherited wealth and were arguably aristocrats. Aristocracy literally means rule by the best, not rule by the few (oligarchy) or rule by the mean and corrupted. A proliferation of dynasty trusts could indeed lead to creation of a privileged class, that is, a class of individuals who have the privilege of not being yoked to an economy that is increasingly centralized, mercenary and subject to decision-making based on maximizing profit or perpetrating lies and myths. As a practical matter, hard work and ingenuity alone are seldom enough to guarantee the livelihood of an individual and his family. The material existence of workers at all levels of society is increasingly subject to the arbitrary will of a manager who thereby wields an inordinate amount of power over the actions of the worker. But, the beneficiary of a dynasty trust is able to resist the will of a manager (or client or political lobbyist or commercial sponsor or spin doctor) because he is not totally economically dependent on him.

Variants of dynasty trusts include a life insurance policy. Because the insurance company lobby is so influential in national and state legislatures, life insurance proceeds in an irrevocable life insurance dynasty trust are exempt from income and estate taxes. Thus, the combination of a life insurance policy owned by an irrevocable life insurance dynasty trust can provide tax-free growth of assets, payment of insurance proceeds to the trust free of estate taxes, and increased financial sovereignty for generations.

The logic of the recent NY Times article seems to be that it is better for society as a whole if custodians of wealth are forced to squander it within two generations, rather than protect it, preserve it and make it grow indefinitely. A common complaint of economists is that publicly-held corporations focus on quarterly or annual financial results, rather than on long-term business growth. Closely-held and family businesses, on the other hand, are valued (at least in principle) for their ability to make business decisions that enhance long-term business viability. As a practical matter, however, unless a private business is held in a trust, it generally disappears, either because of division among heirs or because estate and generation-skipping transfer taxes compel its sale. A dynasty trust provides a vehicle for accumulating and preserving wealth in an increasingly centrally-managed economy controlled by large corporations, government (national and local) monopolies and popular myths. Although inheritance taxes are not paid by a dynasty trust, a trust-owned business must pay income taxes on business and investment income. There is no free tax ride for trust-owned enterprises. A trust, however, provides the long-term stability and continuity necessary for building a business culture based on honesty, service, quality and tradition.

Critics of dynasty trusts raise some legitimate concerns. One is that an individual who does not absolutely need a particular job for his survival will be prone to insubordination in the workplace. A related concern is that beneficiaries of dynasty trusts will cease contributing to society because they no longer need work to survive. An additional concern alluded to above is that dynasty trusts could create a privileged class of aristocrats that uses an unfair advantage to rule the less privileged. The hard facts of reality completely outweigh or negate these concerns, which will be addressed in detail in a future article. Let this article end here, however, with the idea that a society filled with subservient, economically beholden sycophants having no financial sovereignty is a greater danger to the republic than the risk of an economically privileged aristocracy. A general benefit of dynasty trusts for all of society is the financial independence of trust beneficiaries from the tyranny of increasingly centralized economic control and manipulated public opinion, which independence enables freedom of expression and honest, virtuous behavior in a morally corruptible body politic.

Copyright 2010 – Thomas Swenson

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