Over the past two decades, many states have abolished the rule against perpetuities (RAP). At least half of the states now permit either perpetual trusts or trusts that can last for a very long time, such as 360 to 1,000 years. Professor McCouch’s article explores the reasons for the haste with which states have abandoned a principle that’s been part of the common law since the 17th century.1 Other recent articles on this topic put the sole blame on the 1986 introduction of the generation-skipping transfer (GST) tax exemption.2 Prof. McCouch casts a wider net of blame.
Prof. McCouch points to three historical facts to support his conclusion that the GST tax exemption isn’t the sole killer of the RAP. First, before the enactment of the GST tax in 1976, placing property in trust was a viable way to make family wealth available to several generations without exposure to estate taxes. Yet, there was no movement among the states to abolish the RAP to permit perpetual trusts. Second, Idaho and Wisconsin have long permitted perpetual trusts; yet, there was no pre-GST tax movement to set up perpetual trusts in those states. Finally, South Dakota, the first state in recent times to abolish the RAP, did so in 1983, at a time when there was no exemption from the GST tax.
What did cause the repeal movement? The push to abolish the rule wasn’t led by a spontaneous movement of wealthy constituents who suddenly wanted to exploit the GST tax exemption by creating transfer tax-free trusts that would last forever. Instead, the driving force was a cadre of lawyers and bankers seeking to generate more trust business. The appearance of the GST tax exemption in 1986 was only one of several factors that resulted in the widespread demise of the RAP. Prof. McCouch suggests that the Uniform Statutory Rule Against Perpetuities (USRAP) and the stock market boom of the late 1990s were two other important contributing factors.
The USRAP weakened the common law rule, making it more vulnerable to attack. The USRAP, which was promulgated by the Uniform Law Commission in 1986, replaced the link between the rule and actual measuring lives with a durational limitation of 90 years. It was adopted by about half the states. Prof. McCouch argues that the widespread acceptance of a limitation measured by a fixed number of years created an environment in which it was easier to persuade state legislatures to extend the number of years, in two cases for as long as 1,000 years,3 or to abolish it completely.
Although the GST tax exemption was introduced in 1986, it wasn’t until the mid-90s, when the stock market boom was under way, that states, starting with Delaware, began to repeal the RAP. As Prof. McCouch notes, the stock market boom created a large potential market for long-term trusts among newly wealthy individuals who had “little experience with trust investments or sophisticated tax planning.” The promotional literature of the trust companies generally identify a number of good non-tax reasons for establishing long-term trusts, even those that can’t last forever, including providing financial security for successive generations, protecting family wealth from imprudent beneficiaries, providing an environment in which family wealth is more likely to grow, protecting beneficiaries from the claims of creditors and establishing standards of behavior for future generations.
The repeal of the rule gave trust companies another reason to pitch long-term trusts. They could protect family wealth from transfer tax forever. In addition, the establishment of perpetual trusts gave the trust companies a deeper and more stable market in which to sell their investment and fiduciary services. As Prof. McCouch observes, “[s]uch a marketing strategy, with its rhetorical appeal to unlimited private accumulation, settlor autonomy and dynastic pretensions, makes far more sense in times of general prosperity and rising expectations than during an economic slump.”
1. Duke of Norfolk’s Case, 3 Ch. Cas. 1, 22 Eng. Rep. 931 (1682).
2. See, for example, Lawrence Waggoner, “From Here to Eternity: the Folly of Perpetual Trusts,” University of Michigan Law School, Law & Economics Research Paper Series, Paper No. 13-007, April 2013.
3. Colo. Rev. Stat. Section 15-11-1102.5 and Utah Code Section 75-2-1203.