Dynasty Trusts And The Relevance Of The Rule Against Perpetuities

more+
less-

As famously phrased by legal scholars of old, the Rule Against Perpetuities ("RAP") mandates that, "[n]o interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest." Unfortunately, this definition does little to help people understand the true meaning of the RAP. Interestingly enough, however, the RAP actually has increasing relevance in the world today. George Clooney made a movie about it and more importantly, knowledge of the RAP might influence future wealth and estate planning.

The RAP was originally created to ensure that interests in property "vest," or become certain, within a set period of time. Today, the most common encounter with the RAP is in dealing with trusts created for many generations of descendants. A recent example is the story of Wellington Burt — a wealthy Michigan lumber baron with a strong aversion to his immediate family. Burt, who died in 1919, used the RAP and the longevity of his then living descendants to tie up his $100 million estate in trust for ninety-two years! In 2011, Burt's surviving heirs, which currently extend to great-great-great grandchildren, were finally able to reach the principal of his trust when the RAP required the trusts for his descendants to terminate.

Despite the RAP's long history dating to feudal England, Michigan has abolished the RAP with respect to personal property (but not with respect to real estate, to which the RAP still applies). What does this mean for individuals contemplating their estate plans? The easy answer is that it allows people to create "Dynasty Trusts," or trusts for their descendants that could potentially last in perpetuity. For some people, this is important because their wealth is so impressive that there are significant tax benefits to doing so. But for more and more people, a Dynasty Trust can be appealing for the protections it offers to descendants. Properly drafted, a Dynasty Trust can provide tax benefits, can give a trustee great flexibility to determine how to provide for future generations, can protect a beneficiary from himself or herself (i.e., if the descendant is a spendthrift or substance abuser) and can also protect the trust funds from creditors or a divorcing spouse. 

Practically speaking, in the past the RAP didn't affect most families directly because their estate plans were drafted understanding that no trust could last forever. Today, Michigan's abolition of the RAP has changed that fact and has introduced exciting new opportunities for estate planning and asset protection.