Trust Term Extension: An Economic Analysis
20 Pages Posted: 14 Apr 2017
Date Written: 2015
To compete for trust assets following a change in the federal tax code, many states repealed or abrogated the Rule Against Perpetuities (RAP). By repealing the RAP, these states allow a settlor to create a trust that lasts forever: a “dynasty trust” or “perpetual trust.” In a thoughtful article, Trust Term Extension, Reid Kress Weisbord asks: “[C]ould the duration of a trust settled in a jurisdiction governed by the Rule Against Perpetuities be extended indefinitely after the jurisdiction’s repeal of the Rule Against Perpetuities?” While I believe that Weisbord is correct in the starting point of his analysis (the settlor's intent) and his conclusion (the law should not allow a trustee to extend a trust beyond the perpetuities period), I would suggest a different mode of analysis: an economic analysis of trust term extension. An economic analysis of trust term extension (as well as trust modification more generally) should analyze the costs of specifying contingencies in a trust, including potential changes in the law, and the error costs and decision costs of discerning a settlor’s probable intent. Thus, after criticizing three of Weisbord’s arguments, I offer a brief economic analysis of trust term extension and suggest why economic arguments may provide an alternative yet superior justification for generally not allowing perpetual trust conversions of existing trusts.
Keywords: Trusts, Rule Against Perpetuities, Dead Hand Control, Trust Modification, Settlor, Trustee, Beneficiaries
JEL Classification: K00, K36
Suggested Citation: Suggested Citation