Rethinking Perpetual Trusts

Lawrence W. Waggoner, From Here to Eternity: The Folly of Perpetual Trusts, Univ. of Michigan Public Law Working Paper no. 259, available on SSRN.

One of the notable current developments in modern estate planning is that of the dynasty trust, a device for passing family wealth though the generations without the imposition of estate, gift or generation-skipping tax along the way.  Fueled by the combination of clients seeking a measure of immortality, state legislatures seeking to attract trust business, and lawyers and trust companies seeking to secure a “client” that will last for generations, the device has become a must-consider technique for wealthy Americans.

Professor Lawrence Waggoner does not think dynasty trusts represent good public policy, a theme he has addressed in many of his earlier writings.  However, his argument in this piece is slightly different.  Addressing his remarks not only to state legislatures, but to those clients considering implementing a dynasty trust, he contends that dynasty trusts may not serve any useful interest for the very clients clamoring to establish them.  His argument takes two major forms.  First, utilizing some mathematical modeling, he illustrates how the passage of time dramatically multiplies the number of eligible trust beneficiaries of a hypothetical dynasty trust and dramatically dilutes their genetic relationship to the individual who originally establish the trust.  For example, Prof. Waggoner calculates that some 325 years after its inception, a typical dynasty trust might have over 100,000 beneficiaries, and after 450 years might have well over one million such beneficiaries.

Waggoner calculates that the genetic relationship between these beneficiaries and the original grantor would be infinitesimal (indeed no stronger than that of any two average Americans), raising the question of whether a client establishing a dynasty trust today truly would have any affinity towards these distant future relatives.   In illustrating this problem, he doesn’t rely on numbers alone.   Rather, he offers the visual illustration of the descendents of a single grantor being so numerous after 350 years later that the 114,500 members of this “family” could not fit in Michigan Stadium or the Rose Bowl.  He also offers the case of Samuel Hinkley, who died in 1662 and is a common ancestor of George H.W. Bush, George W. Bush and Barack Obama.  Had Hinkley established a dynasty trust, the Bushes and the Obamas would be current beneficiaries.  Genetically, politically, economically, and just about any other way one can imagine, the Obamas and the Bushes are about as diverse as Americans can be.  It’s hard to imagine what any estate planning goal would be served by those two families being sustained by a common source of funds established by a common ancestor.

Second, Professor Waggoner contends that this dramatic increase in the number of eligible beneficiaries creates a whole host of undesirable administrative problems.  Included among these are concerns that current dynasty trust documents may ultimately prove to be as antiquated as their once “cutting-edge” predecessors such as the entail and the strict settlement.  Waggoner also raises concerns about the administrative difficulties in dealing with trustee turnover, as well as the seemingly impossible task of a trustee exercising that trustee’s duty of impartiality when owed to so many beneficiaries in so many different stations of life.  Professor Waggoner contends that these administrative complexities are a concern not only for society at large but for the very individuals contemplating establishing today’s dynasty trusts.  If the wealthy really considered these complexities, Waggoner argues, they might conclude that dynasty trusts simply are not worth the tax advantages.

As with any article, those with differing viewpoints can certainly quibble with aspects of Professor Waggoner’s approach.  Specifically, critics may suggest that he seems to tilt the analysis somewhat in his favor by characterizing the typical dynasty trust as a single trust for cascading generations of beneficiaries.  In reality, as Professor Waggoner discusses in the footnotes of his Article, many of these trusts will subdivide over time so that only one family unit will be the beneficiaries of a given trust at a given time.  If one envisions this structure being the practical norm, then some (but not all) of the administrative challenges he attributes to a dynasty trust (such as inevitable conflicts among multiple generations of beneficiaries) are no more problematic in the dynasty trust context than anywhere else in trust law.  Indeed, one could even contend that it is more administratively efficient to have one trustee or trust company administer hundreds of trusts established under the same master document than it would be to have each generation retain new lawyers to draft new documents to be administered by new trustees.

Despite these potential minor objections, Professor Waggoner’s central thesis remains undisturbed:  trusts lasting for centuries create a host of administrative and interpersonal complexities that clients should more carefully consider.  In sum, this article represents a brief, entertaining, and enlightening contribution to the policy debate surrounding the continued utility of the rule against perpetuities and the desirability of establishing a dynasty trust.  I recommend it highly.

 
 
Discussion

1 comment
  1. 1

    Interesting article! Thank you for the information.