Abstract

http://ssrn.com/abstract=1975117
 


 



From Here to Eternity: The Folly of Perpetual Trusts


Lawrence W. Waggoner


University of Michigan Law School

May 2014

U of Michigan Public Law Working Paper No. 259
U of Michigan Law & Econ Research Paper No. 13-007

Abstract:     
Trusts that can operate for as many as a thousand years or even forever, 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 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 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.

The essay then points out that the primary responsibility for the perpetual-trust movement rests not with the state legislators or the wealthy, but with Congress. The primary responsibility for curtailing it also rests with Congress, but so far Congress has been decidedly uninterested in curtailing the duration of GST-exempt trusts.

Number of Pages in PDF File: 17

Keywords: perpetual trusts, generation skipping transfer (GST) tax

JEL Classification: K10, K34

working papers series


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Date posted: December 22, 2011 ; Last revised: May 21, 2014

Suggested Citation

Waggoner, Lawrence W., From Here to Eternity: The Folly of Perpetual Trusts (May 2014). U of Michigan Public Law Working Paper No. 259; U of Michigan Law & Econ Research Paper No. 13-007. Available at SSRN: http://ssrn.com/abstract=1975117 or http://dx.doi.org/10.2139/ssrn.1975117

Contact Information

Lawrence W. Waggoner (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
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