This week I’m at the Heckerling Institute on Estate Planning. In the Recent Developments session, we discussed the increasingly lengthy term of trusts. Today, 28 states and the District of Columbia have repealed the Rule Against Perpetuities. (The common law Rule is that an interest must vest, if at all, at the expiration of a life in being plus 21 years.)
A recent article (Unconstitutional Perpetual Trusts, by Steven Horowitz and Robert Sitkoff, Harvard Working Paper No. 14-27, to appear in an upcoming edition of the Vanderbilt Law Review) noted that the constitutions of nine states prohibit “perpetuities.” Four of these states, Montana, Oklahoma, Texas, and Arkansas, have the traditional Rule Against Perpetuities. However, five of these states, Arizona, Nevada, North Carolina, Tennessee, and Wyoming, have statutes repealing or substantially repealing the Rule.
Many clients, when choosing a situs for an irrevocable trust, will consider the absence of the Rule Against Perpetuities, as well as tax and other considerations. If a term in excess of the Rule is an important consideration for the client, you will want to weigh the risk that the constitutional prohibition will be held to override the statutory repeal of the Rule. Certainly, there is a good argument that a court may construe the constitutional prohibition not in conflict with the statutory repeal. Further, in states like Nevada and Wyoming, there is substantial economic pressure and financial industry support for the repeal or near-repeal of the Rule. However, there may be a period of uncertainty in these states.
There are many reasons to retain assets in trust for as long as possible. Doing so can shield the assets from divorcing spouses, creditors, taxes, and the beneficiaries’ poor judgment.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
- The Magic of Grantor Trusts - September 19, 2023
- IRS Confirms Grantor Trust Status Alone Does Not Cause a Step-Up in Basis - August 15, 2023
- Double Your Gifting with Spousal Gift-Splitting - January 11, 2022
