Trusts & Estates

States’ Repeal of Rule Against Perpetuities Creates US Aristocracy, Law Prof Says

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The rule against perpetuities that vexed so many law students has been eliminated in many states, and it’s having an impact outside the halls of academia.

The rule had effectively limited the terms of family trusts to about 90 years, Boston College law professor Ray Madoff writes in an op-ed for the New York Times. In the mid-1990s, however, many states eliminated the rule with the aim of attracting business, a goal encouraged by banking lobbyists. Also setting the stage for the change was Congress’ adoption of a generation-skipping transfer tax, with an exemption that eventually amounted to $3.5 million for each taxpayer.

Estate planners taking advantage of the exemption and the elimination of the rule against perpetuities are creating tax-exempt dynasty trusts benefiting generation after generation of heirs, Madoff writes.

“Now any wealthy American can set property aside for his heirs forever, simply by hiring a trustee from one of these states,” Madoff says. The change has fueled the growth in dynasty trusts that benefit generations in perpetuity, “truly creating an American aristocracy,” he says.

“An ordinary trust dissipates as money is distributed to the beneficiaries,” Madoff explains. “But a dynasty trust can avoid this by discouraging outright distributions and instead encouraging trustees to buy, for the use of the beneficiaries, things like houses, artwork, airplanes and even businesses. Because the trust retains ownership, the assets can pass tax-free and creditor-proof to the next generation.

“Beneficiaries don’t pay taxes on the use of this property. In contrast, a worker whose employer provides housing or other benefits is taxed on those benefits.”

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