However, I do agree with you that it might be a robust guard against the inherited wealth class gaming the system. I would prefer to intervene when such injustice is committed, but admit that that is not always easy to do. The argument you use for curtailing that risk is similar to the argument I would make in favor of term-limits.
If a trustee loses everything then the next year, they have access to another annuity distribution.
This is actually an interesting experiment. I'll run a crude test this weekend bootstrapping against the S&P500 to see how likely it is for wealth to propagate X generations into the future and report on Monday.
as diversity approaches 100%, performance approaches market returns.
The question is, how long can extreme wealth remain extreme wealth? Considering the wealth gap is increasing, I would suggest forever unless there is a "market correction" like socialism or something.
There might not be decay at all if you account for the exponential growth of investments.
However, it is true that being able to pass on wealth to one's children can be an incentive to produce more, so that on the other hand points to the benefit of a lower estate tax.
So, I think the best compromise is somewhere between the pro-meritocracy 100% tax and the pro-short-term-productivity 0% tax; that way there is still a significant incentive to earn for one's offspring, but if 1/x of the money is taxed away in each generation (and the important thing is not where it goes, but that it is taken out of the hands of the rich family), there is an exponential-decay curve for the wealth and power of the family. However, it's important that the tax is high enough to counteract the interest gains that even uninspired investing can bring. I won't venture to propose a sweet spot, but I think that approach should provide the most balance and social benefit overall.