Top-Down versus Bottom-Up Law Reform in Trusts and Estates: Future Interests and Perpetuities

  • Lawrence W. Waggoner, The American Law Institute Proposes Simplifying the Doctrine of Estates (May 21, 2010). U of Michigan Public Law Working Paper No. 198,  available at SSRN.
  • Lawrence W. Waggoner, Curtailing Dead-Hand Control: The American Law Institute Declares the Perpetual-Trust Movement Ill Advised (June 1, 2010). University of Michigan Public Law Working Paper No. 199, available at SSRN.
  • Lawrence W. Waggoner, The American Law Institute Proposes a New Approach to Perpetuities: Limiting the Dead Hand to Two Younger Generations (June 1, 2010). University of Michigan Public Law Working Paper No. 200, available at SSRN.
  • Lawrence W. Waggoner, Congress Should Impose a Two-Generation Limit on the GST Exemption: Here's Why (July 15, 2010). U of Michigan Public Law Working Paper No. 205, available at SSRN.

Trusts and estates law reform generally follows one of two patterns. In the first, which we can characterize as top-down, the American Law Institute or the Uniform Law Commission sponsors a reform through a new Restatement or Uniform Law, often but not always prepared in concert. Top-down reforms are typically designed to update the law in accord with emerging academic and elite practitioner policy consensus on necessary revision to the canon. The prudent investor rule is perhaps the quintessential example of a successful top-down reform. In the other law reform pattern, which we can characterize as bottom-up, local bankers and lawyers lobby state lawmakers for a specific reform. Bottom-up reforms are usually meant to attract trust business (think perpetual or asset protection trusts), but not always. Some are meant to fill a gap in the top-down reforms (think unitrust, an alternative to the power of adjustment under the Uniform Principal and Income Act). Either way, owing to the commercial necessity of appealing to apparent donor preferences, the bottom-up reforms tend to enhance the reach of the dead hand (even the unitrust, a gap-filling bottom-up reform, is more solicitous of the dead hand than its top-down alternative, the power of adjustment).

In a quartet of short essays, Professor Lawrence W. Waggoner (Michigan) examines a pair of top-down reforms, just approved by the ALI, which will appear in the final volume of the Restatement (Third) of Property: Wills and Other Donative Transfers, for which Waggoner is the reporter. The reforms are: (1) a simplification of the law of estates and future interests, and (2) a reworking of the Rule Against Perpetuities. The reforms prompt two questions: (1) why these reforms, and (2) will they take hold? Waggoner’s essays focus primarily on the former question, though he gives some treatment to the latter, particularly as regards the new Rule Against Perpetuities.

The American law of estates and future interests, inherited from England, is a preposterous collection of feudal relics with no contemporary policy relevance. Although abandoned in England by 1925, the feudal relics have proved durable in the American law. In 1937, Professor Lewis M. Simes predicted that the First Restatement’s collection of the “obscure and complicated” rules was so “clear and accurate” that legislation “correcting the difficulties which have been discovered” was sure to follow. We’re still waiting.

But perhaps not for much longer. As Waggoner explains in straightforward prose, the new Restatement jettisons the relics in favor of a rationalized system with intuitive nomenclature reflecting substance rather than form. With respect to present interests, the fee simple determinable, fee simple subject to a condition subsequent, and fee simple subject to an executory limitation are collapsed into the simpler and more sensible title fee simple defeasible. With respect to future interests, the executory interest is collapsed into the term remainder; the possibility of reverter and the right of entry are collapsed into the term reversion; and a remainder or a reversion is deemed contingent or vested based solely on whether the interest is certain to take effect in possession or enjoyment.

The American law of perpetuities, meanwhile, has become an unprincipled mess. In the years following the 1986 enactment of the Generation Skipping Transfer Tax, the states became locked in a race to repeal or otherwise defang the Rule (e.g., by making it a default subject to override by the donor!) to allow perpetual or effectively perpetual trusts. The movement to validate perpetual trusts reflects not a considered change in policy about trust duration, but rather the pressures of the jurisdictional competition for trust funds.

In Waggoner’s view, perpetual trusts are bad policy. Waggoner’s argument, which is refreshingly consequential rather than deontological, emphasizes the related problems of administration and changed circumstances. Perhaps some of the problems of administration to which he points could be ameliorated with liberal rules of trust division and termination of small trusts. But even so, there is something powerful about this arresting line: “If Samuel Hinckley, who died in Massachusetts in 1662, had created a perpetual … trust for his descendants, the … beneficiaries living in 2010 would include President Barack Obama … and former President George H.W. Bush.”

Instead of a rule against remote vesting, with the attendant morass of implementing complexity, the new Restatement provides for a direct rule of trust duration. Under the new Restatement, a trust must terminate at the death of the survivor of the donor and all beneficiaries who are no more than two generations younger than the donor. The new rule of trust duration is meant is to honor the purpose the ancient rule against remote vesting as a prophylactic against the problem of changed circumstances, but in a form that is simpler and yet still self-explanatory of the rule’s underlying policy. In the final essay of the quartet, Waggoner urges Congress to follow the Restatement’s two-generation template in limiting the duration of the GST tax exemption. If Congress were to do so, the new Restatement would then provide the obvious model for rationalizing state perpetuities law.

This last point brings into view considerations of political economy. The currency of the top-down reforms is prestige. The imprimatur of the ALI or the ULC gives the top-down reforms presumptive policy credibility. But the Restatements and Uniform Laws are not self-executing. The success of top-down law reform depends in significant part on the cooperation of the local bar and bankers associations. Their opposition to a Uniform Law or their lobbying for a legislative override of a judicial adoption of a Restatement provision is almost always the death knell of the contested top-down reform.

Which is to say, the currency of the bottom-up reforms is politics. The support of the local bar or bankers associations provides political viability. At the same time, coordination of bottom-up reforms with national top-down initiatives allows those bottom-up reforms to borrow some of the presumptive legitimacy of the top-down reforms.

So the relationship between the top-down and the bottom-up reforms is uneasy. In cases of direct conflict (the mandatory duty to give information under the Uniform Trust Code is a recent example), the bottom-up view tends to win because the bottom-up reformers are more closely allied with state lawmakers. Waggoner is therefore right to focus on the connection between state perpetuities law and the GST tax. So long as the GST tax exemption is of unlimited duration, there seems little hope for restoration of any constraining state law rule of trust duration. The bottom-up perpetual trust movement is too powerful.

But what of reform of estates and future interests law? Perhaps the state courts will adopt the new Restatement piecemeal. But against this are three sources of friction: the need for a suitable case, the aversion of generalist judges to embrace specialized or technical reform, and the tension between the interconnected nature of the reforms and the case-focused common law method. Alternatively, perhaps the Uniform Law Commission will promulgate a Uniform Law on future interests. In that case the trick will be crafting a law for which the bottom-up reformers will be in sympathy, so that they will urge the law upon the state legislatures.