I attended a dinner at a bank—as it happens, my bank—on Tuesday night. The topic? Current Trends in Trust and Estate Planning. ‘Twas a fine presentation, with decent wine, a good meal, and a speaker worth listening to. And an hour of continuing education credit.
The speaker, a banker, focused his talk on dynasty trusts. There is no particular definition for a dynasty trust: in simple terms it’s a trust that lasts a long time.
Now, I was in law school between 1978 and 1981, many years ago. I learned about the Rule against Perpetuities. This rule, as I learned it, held that no property in a trust could vest in a beneficiary after all lives in being ended, plus 21 years. Here’s another take, from Duhaime.org. (Don’t worry; no test!)
The Rule against Perpetuities looks with disfavor on efforts to limit control from the grave and, more significantly, concentrations of wealth over many generations. The rule has been around, and bedeviling attorneys and others, for centuries. So difficult can be the rule that in 1960, in Lucas v. Hamm, the California Supreme Court held that an error regarding the Rule against Perpetuities did not form a basis for a professional negligence/legal malpractice claim.
(By the way, an intentional drafting error formed the basis for Mattie Walker (Kathleen Turner) walking away with everything in Body Heat. That and a murder!)
So what does all of this have to do with anything? Well, the Rule against Perpetuities has been effectively abolished in 29 states, either by extending the vesting period to hundreds of years or more (it’s 500 years in Arizona), by allowing for a determination that the Rule has been violated on the back end, by allowing for reformation, or some combination of all three. Now, property can be left to successive generations for, effectively, forever.
At the dinner the banker discussed this issue, but he backed up his discussion with math. He assumed a family with demographics akin to those of wealthy people. Smaller families, children born later, high education expenses, etc. He assumed reasonably conservative growth of assets, consistent with appropriate management of a trust. (No home runs!) And fees to a trustee. And what happened? Well if you’re 70-ish, you have about $5,000,000, and your grandchildren—in their late 20s and early 30s—are starting families, available funds will last another couple of generations beyond your grandchildren. Basically, even with the “high end” demographics and what represents a pretty high degree of wealth, the number of trust beneficiaries and their basic needs will outpace the money.
So, while attorneys acting through the Uniform Laws Commission and many state legislatures have worked hand-in-hand to pass laws that let people do whatever they want with their assets, basically forever, reality bites! Aside from making people feel better, as in “no one’s telling me what I can do with my stuff,” and rendering obsolete a rule that challenged attorneys, these changes have accomplished not very much at all.
(By the way, I have dealt with the Rule against Perpetuities once in my 32+ years as an attorney. In that instance my client was challenging the Arizona 500-year rule, as it seems to violate Article I, Section 29 of the Arizona Constitution, which limits the right to make laws permitting perpetuities. The Court disagreed with our position.)
P.S. Two things: First, with more money than $5,000,000-ish, payment of taxes outside the trust, etc., a dynasty trust may last for more generations. Hundreds of years? Probably not. Longer? Yes. Second, a trust designed to provide for later generations requires an investment policy that does limit returns. While an outright distribution to living beneficiaries takes away from future generations, it does provide the living beneficiaries with “stake” money to go forth and be successful.