¶ 2201
Overview
Scope of the chapter. For three centuries the rule against perpetuities set the outer limit on how long a family could keep wealth in trust. A trust for the settlor's children and grandchildren, ending at the death of the last grandchild, could be drafted to satisfy the rule. A trust for great-great-grandchildren, or one with no terminating event, could not. Since 1983 more than half the states have abolished the rule for trusts, allowed settlors to opt out of it, or replaced it with a fixed period long enough to make a trust effectively permanent: 300, 360, 365, 500 or 1,000 years. The result is the dynasty trust, a trust designed to hold property for as many generations as the family produces, free of transfer tax at each generation if the settlor's generation-skipping transfer tax exemption is allocated to it. This chapter examines the law that makes such a trust possible and the design questions that a trust of unlimited duration raises. It begins with the common-law rule (see infra ¶ 2210) and the reforms that softened it before any state abolished it (see infra ¶ 2220). It then surveys the states that have abolished the rule or allowed settlors to opt out (see infra ¶ 2230) and those that have substituted a fixed period (see infra ¶ 2240), with a comparative table. It examines the constitutional provisions that condemn perpetuities in several states and the two decisions that have construed them in this setting (see infra ¶ 2250), the treatment of powers of appointment, including the federal estate tax provision known as the Delaware tax trap (see infra ¶ 2260), and the policy debate over perpetual trusts (see infra ¶ 2270). It then turns to the duration rules of the three international trust jurisdictions treated in this book (see infra ¶ 2280) and closes with the design of a trust meant to last for generations (see infra ¶ 2290).
Why duration matters. A long-term trust offers three advantages. The first is tax. Property held in a trust to which generation-skipping transfer tax exemption has been allocated passes from one generation to the next without estate tax, gift tax or generation-skipping transfer tax for as long as the trust lasts, and the growth on the exempt property is sheltered with it. The transfer tax design of such a trust is examined in chapter 23 (see infra ch. 23); this chapter treats the tax only as far as it shapes the property rules. The second is protection. A beneficiary's interest in a discretionary trust protected by a spendthrift provision is generally beyond the reach of the beneficiary's creditors and, in many states, of a divorcing spouse (see infra chs. 36, 39). Property distributed outright has no such protection. The third is management. A trust keeps a family's concentrated holdings, real estate, collections or operating businesses under a single governance structure, with professional or family fiduciaries, instead of dividing them among a growing number of heirs (see infra chs. 30–35).
Why duration is hard. The same features create the problems a drafter must solve. A trust that lasts two centuries will be administered under laws, tax regimes and family circumstances that its settlor could not foresee. Its beneficiaries will number in the hundreds, many of them strangers to one another. Its trustees will change many times, and the trust company named in the instrument will very likely not exist. A trust of long duration therefore needs mechanisms for change: powers to modify administrative terms, to move the trust, to divide it into separate shares, to replace fiduciaries and to end it when it has served its purpose. Those mechanisms are the subject of Parts II through IV of this book (see supra chs. 6–21), and ¶ 2290 draws them together for the dynasty trust.
Terminology. This chapter uses three terms with care. The rule against perpetuities is the rule against remote vesting, which invalidates an interest that might vest too far in the future. The rule against suspension of the power of alienation is a separate rule, adopted by statute in South Dakota, Alaska, North Carolina and a few other states, that voids an interest or trust which suspends the power to convey absolute ownership for longer than a permitted period. A dynasty trust is a trust designed to last for more than two generations below the settlor, usually as long as the governing law allows. The term carries no legal meaning of its own. Table 22-1 summarizes the duration rules of the principal trust jurisdictions (see infra ¶ 2240.09).