This post is part of a symposium on Melinda Cooper’s Counterrevolution: Extravagance and Austerity in Public Finance. Read the rest of the symposium here.
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When people send sentimental cards or hang dubious wall art proclaiming “families are forever,” little do they know how right they are. Families are forever because, as Melinda Cooper reminds us in Counterrevolution, “[t]here is no better instrument for the long-term hoarding of wealth than the legal haven of the family.” Put even more succinctly: “The family is truly a tax haven in a heartless world.”
Cooper’s story of the family as a unit of profit and wealth maximization begins in the 1980s, when, under Ronald Reagan ultra-rich families—what Cooper calls “family dynasts”—benefitted from a host of tax reforms, all grounded in supply-side theory. These reforms, which included decreases in capital gains tax, accelerated depreciation schedules, and the gutting of the estate tax, set in motion an anti-gravity, upward redistribution of wealth.
Yet in the resurgence of family capitalism, the tax cuts that put staggering amounts of wealth in the pockets of family dynasts are only half of the story. Equally important were contemporaneous trust law reforms that helped these families protect their new gains in ways previously thought impossible, providing new opportunities for families to both consolidate and transfer large fortunes from one generation to the next without legal friction. That is to say, accumulation demanded preservation. Looking at the twinned stories of tax cuts and trust law liberalization, then, allows us to capture additional facets of the deregulatory story of the 1980s and beyond—and to better understand the return of dynastic family planning and high-wealth exceptionalism.
Trust Law and the Trifecta of Reform
Cooper’s story, while it has deep roots, begins around the time of Reagan’s presidency. The “supply-side revolution,” which had started in the 1970s, bore its first real legislative fruits with the 1981 Economic Recovery Tax Act (ERTA)—a massive subsidization for high-wealth families. It was also around this time that trust companies, along with state legislatures, began devising new ways to draw business to their states by reforming trust law in a manner that proved intensely useful for families with burgeoning fortunes.
South Dakota led the way in catering to ultra-rich clients with newly earned money to protect by creating a welcoming legal environment for those with wealth preservation needs. A strong opening move in this direction was the state’s repeal of the Rule Against Perpetuities in 1983, which enabled asset-protection trusts to last perpetually, thereby keeping family fortunes safe from erosion through burdensome taxable events as well as the spending of profligate beneficiaries at trust termination. By upending longstanding trust rules (and eliminating most state taxes), South Dakota became by its own account “the first boutique dynasty trust jurisdiction” governed by “innovative modern trust laws.”
These changes proved incredibly valuable once Reagan’s next Tax Reform Act was passed in 1986, containing the new Generation-Skipping Tax. Put in place in an attempt to ensure that wealth was taxed at every generation, the Generation-Skipping Tax seemingly represented a hurdle for high-wealth families. There was, however, a hidden gift in the legislation—an exemption to the tax (originally $1 million and currently around $13.5 million per person/$27 million per married couple). The ultra-rich could therefore place the tax-free exemption amount in new “dynasty trust,” and it would be invested and grow exponentially over time, without any foreseeable forced distributions or termination. When the new tax rules—including the exemption—were enacted, South Dakota was primed to take the exemption dollars and help families establish dynasty trusts, which in the words of the trust companies would “transfer significant wealth between generations” and “promote family values.”
Other states, like Wyoming, Delaware, Alaska, and Nevada, followed South Dakota’s lead and soon joined the ranks of the domestic tax havens. And when the same group of states passed legislation authorizing Domestic Asset Protection Trusts (DAPTs) and trust decanting statutes in the 1990s, all the pieces were now in place to take family wealth preservation to levels unseen since the Gilded Age. DAPTs, designed by American trust lawyers and authorized by state legislatures in an attempt to compete with offshore jurisdictions, allowed rich families and individuals to put their own (recently earned) money into irrevocable trusts, receive distributions, and also receive asset protection. That is to say, assets in these trusts were protected from a wide range of creditor claims including those of divorcing spouses, taxing authorities, bankruptcy administrators, and even judgment creditors. All of these creditors would come away from a DAPT empty handed as long as the trust terms were drafted correctly. These “selfie” or “new money” trusts were a far cry from the traditional “old money” trusts that allowed beneficiaries to receive asset protection only when the trust had been set up by a third party, like a rich parent or grandparent. Decanting statutes, the last piece of the puzzle, gave trustees the statutory authority to “decant” the assets without judicial approval from an old trust into a new one—one located perhaps in a more tax- and trust-friendly jurisdiction where robust asset protection was on offer as well.
Dynastic Family Planning
Super-rich families became, accordingly, the primary target for trust companies in these newly minted “onshore offshore” states. The number and variety of family planning options increased exponentially in response to the needs of families making new fortunes in the 1980s—the corporate raiders, the hedge funders, and, as Cooper reminds us, the real estate moguls like Donald Trump.
Perpetual existence was a draw, both for tax reasons and for the imaginative appeal of a never-ending financial legacy, as were the asset-protection rules in these states that barred almost all creditors from reaching the family money, even (ironically) family creditors like children with child support orders. Furthermore, these family trusts also offered robust financial privacy, particularly when trust settlors chose to combine the use of a variety of family-friendly vehicles in order to create as many layers of financial secrecy as possible. For example, a family might have a business interest organized as a Family Limited Liability company or a Family Limited Partnership. The shares of that entity could then be owned by a DAPT. In Wyoming, trust planners named this charming “double barreled” configuration the “Cowboy Cocktail” and claimed, “when [a Wyoming DAPT is] combined with a Wyoming LLC into a Cowboy Cocktail, the concoction is potent.” If an ultra-rich family needed even more privacy in the management of their family affairs, they could create an unregulated Private Trust Company, a vehicle exclusively reserved for families with substantial assets as well as a substantial desire to avoid reporting requirements. The financial privacy created by obscured ownership had (and still has) major benefits in terms of wealth preservation. If the money is hard to find, it is hard to tax, just as it is hard to divide during a divorce. It is no coincidence that tax havens are also often called financial secrecy jurisdictions.
Moreover, as Cooper points out, if families needed an organizational umbrella, they could turn to a family office, the administrative offices that many high-wealth families create in order to manage their personal and financial affairs. The family office would help manage the family investments but also the family as investment, coordinating the financial affairs of all the family financial institutions—the family business, the family trust, and the family foundation. Family offices, Cooper notes, grew enormously in number starting in the 1980s. But they truly became as an elite family “must-have” in 2010 when they began to receive specialized legal treatment in the form of an exemption from the definition of “investment adviser” under the Dodd–Frank Act. Stunningly expansive, the definition of family in that Act was a demonstrable indicator of what the corporate family looked like. For example, “family members” included not just all lineal descendants and their spouses, but also key employees (including executive officers, directors, trustees, general partners, or family office employees), and family clients—including any non-profit or charitable organizations funded exclusively by family clients as well as any company wholly owned by and operated for the sole benefit of family clients. With this working definition, the corporate family truly was a “forever” family.
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Endowing the elite family with overwhelming importance as a unit of wealth acquisition, accumulation, and management, family money rules crafted in the 1980s transformed the high-wealth family into something new that looked a lot like something old: the imperial family, the patrimonial family, the family as a web of property relations strengthened through marriage and other strategic alliances. It should come as no surprise, then, that as family fortunes grew through the Reagan years and beyond, wealth planners began to market the family constitution as a necessary document for all family dynasts. Families with fortunes, the wealth planners suggested, needed to visualize themselves as self-regulating and self-sustaining entities that held “constitutional conventions,” voted on “laws,” and established dispute-resolution mechanisms all to oversee the proper functioning and transference of family money. In the resurgent world of family capitalism, the family constituted not only a mechanism for wealth accumulation and preservation but also a site of imagined political sovereignty.
