February 16, 2005

Dynasty Trusts are the Opposite of Great Legacies

When I was in law school, the rule against perpetuities was something everyone had to learn and had to explain.  Think of it as a rule against dynasties, against a family or a group maintaining economic power for several generations.

The rule against perpetuities comes from the common law and prevents property from being held perpetually in trust by voiding any agreement (which varies from state to state) which does not end twenty one years after a life in being, or one generation from lives presently in being plus twenty-one years. 

When trusts were drafted back in my early days of practice, they would end twenty one years upon the death of the youngest grandchild or Carolyn Kennedy, both then lives in being.

The rule against perpetuities is now being flagrantly flouted.  Thanks to the Wall Street Journal research, I learned that  in Alaska and South Dakota, trusts can last forever; in Delaware, most trusts can last forever but real estate can be held in trust for only 110 years; in Wyoming, trusts can last for 1000 years, and in Florida, trusts can last for 360 years.  These states are particularly egregious because they don't impose income taxes on trusts created by or for nonresidents.  Some fifteen other states have changed the rule against perpetuities and permit dynasty trusts which last forever or for hundreds of years.  You don't have to be a resident of the state to take advantage, so long as a trustee is located there.

The result could easily be predicted. The Wall Street Journal reports that $100 billion in assets has flown into personal trusts in those states.  The bank and trust companies managing the trusts and holding the assets have collected about $1 billion in annual trustee fees.  Families can avoid all federal estate and generation skipping taxes FOREVER under the current federal tax laws.  With  such trusts, people can protect their assets against bankruptcy, divorce, lawsuits and other creditors.  Some estate planners are urging their clients to fund their dynasty trusts now. 

Hats off to the research by Robert Sitkoff and Max Schanzenbach at the Northwestern University School of Law and to Rachel Emma Silverman who reported for the Wall Street Journal.

If Congress doesn't do something, we can look forward to more and more of the nation's wealth and economic power concentrated in the hands of bank and trust companies.  This is not the recipe for a future great society.  I have seen the disastrous effects that great inherited wealth has on too many people who struggle to find a purpose in their lives.

With the nation debating how to protect and fund social security for the future economic health of all Americans, nothing seems more repellent and un-American than the rush by those wealthy and socially unconscious to set  up their own economic dynasties and avoid all taxes in doing so.  Dynasty trusts are the opposite of great legacies.

UPDATE:  While I believe that trusts can be a good vehicle to pass on wealth to people that you know like your children and grandchildren which are the lives in being the Rule of Perpetuities envisioned, trusts that last beyond that time are vehicles to perpetuate the accumulation and protection of wealth for bloodlines forever, a perpetual oligarchy that's antithetical to the American dream.

Posted by Jill Fallon at February 16, 2005 7:48 PM | Permalink