A Review of Perpetual Trusts?

Stack of law books“Why do we care about these perpetual trusts?” Mr. Sitkoff said. “Because there’s a lot of money in them. Billions of dollars is pouring into these jurisdictions.”

Perpetual trusts: good or bad? The principle of this tool is up for debate.

Perpetual trusts allow trust creators to maintain some control after they pass, and help protect fortunes from taxes and creditors. However, people who set up these perpetual trusts in states where they’re legal could have some headaches as lawsuits brought in a state where the trusts are prohibited could mean the out-of-state assets could be counted in any settlement.

This was the topic of a recent New York Timesarticle, titled The Ins and Outs of Trusts That Last Forever.” In other words, all of these very expensive, carefully worded, and very sophisticated documents might fail to work as designed.

Perpetual trusts have been around a long time and were originally used for charitable purposes. Until recently, these trusts were subject to a limit on duration based on the life span of all the people alive when it was created plus 21 years, so about 100 years or so. But this has changed. The first state to allow perpetual trusts (without a time limit) to preserve family wealth was South Dakota in 1983. Now there are several states that allow this practice.

In addition to creating a legacy to last forever, perpetual trusts don’t have to make distributions. In never requiring a trust to be distributed to a beneficiary, the assets are protected for future generations,” according to the original article. If these trusts are set up correctly, they can grow without taxes as they are handed down to the next generation.

Critics of perpetual trusts argue against them on moral grounds. They say tying up money for generations is bad public policy and could create a virtual aristocracy. They argue that legal challenges to these trusts could come from two sources: (i) creditors in a state where the trusts are not permitted who are trying to maximize their settlements and see the trusts as sources of money; and (ii) descendants who want to break the trust and get at their money now without strings attached.

Nine states constitutionally prohibit perpetual trusts: North Carolina, Tennessee, Arkansas, Oklahoma, Texas, Arizona, Nevada, Wyoming, and Montana; however, five of these states have legal workarounds that allow these trusts to exist with some limitations.

Contact your estate planning attorney to find out more about perpetual trusts and how they might fit into your estate planning strategy.

For additional information on elder law and estate planning topics in Houston, please visit my website.

Reference: The New York Times (December 5, 2014) The Ins and Outs of Trusts That Last Forever


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