Trust Term Extension

Abstract

Over the last thirty years, most jurisdictions in the United States repealed or abrogated the Rule Against Perpetuities, which prohibits perpetual donor control over property. This, in turn, led estate planning practitioners to consider whether a trust created to comply with the Rule could, after the Rule’s repeal, be extended in perpetuity to provide for future generations of the settlor’s descendants. Trust term extension in this context implicates questions about the fundamental purpose of a trust – for whose benefit does the trust exist? The beneficiaries, the settlor, or the trustee/fiduciary? If a trust’s purpose is to benefit beneficiaries selected by the settlor, then modification impairing interests of existing beneficiaries should be disallowed. Perpetual trust conversions, however, would impair existing beneficiaries because remainder interests would be converted into less valuable life interests. By contrast, financial institutions serving as corporate fiduciaries would benefit from perpetual trust conversions because they earn commissions for performing administrative and managerial services. This article, the first to examine the topic of trust term extension critically, argues that courts should reject perpetual trust conversions for at least two reasons. First, modification should not be granted for the benefit of the fiduciary, particularly at beneficiary’s expense. Second, the modern trend in trust law favors the rights of living beneficiaries over dead hand control, so evidence of what the donor would have wanted but for the Rule should not override vested beneficial interests.

Keywords: trust, Rule Against Perpetuities, gift tax, estate tax, GST tax, generation skipping transfer tax, perpetual, financial institutions, trust decanting, equitable deviation, spendthrift