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Thursday, January 19, 2012

Waggoner: The Folly of Perpetual Trusts

Lawrence W. Waggoner (Michigan), From Here to Eternity: The Folly of Perpetual Trusts:

Trusts intended to operate for as many as a thousand years or even in perpetuity, typically for the benefit of the settlor’s descendants living from time to time, now and in the future, are all the rage in banking and some estate planning circles. Before 1986, when Congress passed the federal generation skipping transfer tax (GST tax), settlors had little incentive and probably little desire to establish perpetual trusts, even though they were permitted to do so under the law of Wisconsin, South Dakota, or Idaho. The GST tax created an artificial incentive for the wealthy to establish such trusts.

The origin of the perpetual-trust movement is the GST exemption, which is part of the GST tax. When Congress granted the GST exemption, it did not impose a durational limit on trusts that qualify for the exemption, but instead relied on state perpetuity laws to supply that limit. The reliance on state perpetuity laws was badly misplaced. At the instigation of state banking groups and some estate-planning attorneys, states began to pass legislation allowing trust settlors to create perpetual trusts — trusts that can last for several centuries or even forever. With state perpetuity laws out of the way, the wealthy began creating perpetual trusts in significant numbers.

This essay questions whether the state legislators who vote to authorize perpetual trusts and the wealthy who create them are thinking through what they are allowing or putting in place. The essay shows the folly of such trusts, primarily by producing a table projecting how, with each step down the generational ladder, the number of beneficiaries will proliferate and the settlor’s genetic connection with the beneficiaries will decline.

http://taxprof.typepad.com/taxprof_blog/2012/01/waggoner-.html

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