Perpetual trusts, also known as “dynasty trusts,” seem to be all the rage. These trusts are designed to last multiple generations and avoid the Rule Against Perpetuities (RAP). You might ask why they are bad ideas. We’ll give you some examples, and the reasons will become self-evident.
There are many reasons these trusts are becoming increasingly common. States enjoy the benefits of having trusts managed and domiciled in their state so they can collect income tax returns and fees on these trusts for generations. Attorneys may benefit from these trusts, too, especially if they have personal interests in trust companies in the states that allow these perpetual trusts, which is a conflict of interest!
It’s reasonable to ask, “What could be the problem? What’s wrong with wanting your assets to last for many generations? What’s wrong with controlling how the assets are invested or distributed to your progeny?”
The thing is, we cannot see the future and how current trust language will affect your heirs 100 years from now, let alone 200 or 300 years from now. For example, the grantor of a dynasty trust that was created around 1920 did not want their heirs to have an incentive to adopt a lot of children to get a bigger “slice of the pie.” So, they specifically put in the language of the trust document that beneficiaries must be “of the body.” Who could have imagined in 1920 that there would be such a thing as surrogate mothers. This is exactly what happened in that family 70 years after the trust was funded. Imagine the cost of litigating that issue!
That is just one simple example of the downside of creating trusts that will last hundreds of years. In another example, a grantor created a philanthropic organization before community foundations had been conceived (in 1914). This non-profit’s purpose was to thank the residents of a small Southern town for making it possible for the grantor’s family to profit handsomely. The grantor’s family had the best of intentions to “give back” – but that town is now a ghost town, and an enterprising wealth holder bought the town and became the sole beneficiary of the trust. This is not quite the outcome the grantors intended.
In both of these examples, the grantors’ intentions were honorable and forthright. As you’re planning your estates, it might be best to consider that you cannot predict the future, and accept that you cannot or may not want to control from the grave for many generations. Your heirs may make mistakes, and they may lose money. They may also decide not to have children, which we have seen repeatedly, leaving no heirs to receive the benefits of your dynasty trusts. It’s important to accept these possibilities and move on.
Listed below are states that allow perpetual trusts:
- Alaska
- Delaware
- Nevada
- South Dakota
- Wyoming
- Florida
- New Hampshire
- Ohio
- Tennessee
- Missouri
- Rhode Island
- Utah
- Virginia
These states have reformed or abolished the Rule Against Perpetuities. While there may be advantages to creating trust in these states, before you set up any trusts – especially irrevocable trusts – it’s advisable that you fully understand why you’re creating those trusts in any of those states. All of those states also allow non-perpetual trusts, and there may be good tax reasons for implementing them.
If your attorney is recommending a trust that raises concern for any reason, and you are wondering what the impact may be on future generations, please feel free to contact us at The Wealth Conservancy. We are not attorneys, and we are not salespeople, but we can give you an objective thought on the direction you’re considering.