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WSJ.MONEY Updated March 7, 2013, 10:45 a.m. ET

LEGACY

You're Dead, But Still in Control

Perpetual trusts have become popular among the wealthy. But just how long does forever
really last?

Article Comments (2) MORE IN PERSONAL FINANCE »

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By JOHN KOTEN

ETERNITY IS A BIG NUT TO CRACK.

I'd suggest asking the Duke of Norfolk
about this, but he died in the 17th
century. Attempting to achieve a form
of immortality, the duke devised a then-
innovative estate plan that passed his
titles to his offspring and on through
many generations. Not long after his
death, however, the House of Lords
tore up his will, ruling that tying up
property well beyond the lives of people
then living would eventually impose too
many difficulties on future generations.
Thus was born what has since become
known as the "rule against
perpetuities."

As one might expect from the British,

Enlarge Image
Illustration by Marco Ventura
the rule is an entirely sensible and
practical one. Why should those of us
alive today be encumbered by all sorts of rules and instructions from ancestors who
died many generations ago? Or, to put it another way: Just how much power
should dead people have?

But more than 300 years later, folks are still trying to establish legal ways of
extending their wealth and influence past the grave. Perpetual trusts—no one
knows how long they'll actually last—are currently legal in 29 states, and New York
is considering the idea. "It's all the rage right now," says Kathleen Scallan, an
estate lawyer with Sidley Austin in Chicago. "Clients are attracted to the idea of
leaving a lasting family legacy." The appeal, she notes, also includes the ability to
shield trust-held assets from both creditors and from taxation. Forever.

Actually, until 1986 only three states—Wisconsin, South Dakota and Idaho—
permitted perpetual trusts. That, however, was the year that Congress moved—sort
of—to stop people from avoiding estate taxes by leaving fortunes to their
grandchildren instead of their children. Yet with the same bold stroke that federal
lawmakers established the generation-skipping transfer tax, they also permitted the
creation of trusts that were exempt from this tax. (Follow that? It's true, I swear.)
Congress didn't limit the length of the trusts but instead left it to state perpetuity
laws (descendants of the original British common law) to supply the boundaries.

A lobbying free-for-all ensued: Bankers,

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financial planners, brokerages and
estate attorneys started pushing state
legislators to lift durational limits on
Available to WSJ.com Subscribers
trusts to keep the money from flooding
to states that had no limits. (Individuals
can set up a trust in any state.) Within Emerging Markets:
six years, more than half of the states Should You Bond With
had acquiesced, and $100 billion had Azerbaijan?
Enlarge Image flowed into perpetual trusts, according
The Intelligent Investor: Norway: The New
to a 2005 article in the Yale Law
Yale? Journal. Stubborn TB
Taxes: It could Be Worse
Exposure Grows Along
Phases II: Boomers on Board Leaving aside the social question of
Border
whether such trusts, also known as
"dynasty trusts," will create an American aristocracy, let's inquire whether the
(mostly) wealthy families that bought into the craze are well-served. University of
Michigan professor Lawrence W. Waggoner is one expert who doesn't think so. He Companies
published an article last September in the school's law journal noting that because Challenge Labor
each passing generation's genetic influence is halved, by the 14th generation, a Rulings
trust originator's relationship to an heir is reduced to 0.0061 percent—about the
same genetic connection you have with the dope who just dialed your cellphone Jobs Upturn Isn't Enough to Satisfy Fed
from the Ukraine.

Or consider this: Assuming two children per family per generation, a perpetual trust
would have 450 living beneficiaries 150 years after its creation, more than 7,000
after 250 years, and 114,500 after 350 years—more people than would fit in the U
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of M's football stadium, Waggoner notes. A trust that grew to such a size would
have to employ many scores of bankers, brokers, financial planners and lawyers to
administer to its abundant tentacles. Its legal documents would have to be kept up
to date; its assets managed; and the inevitable disputes over its assets would have
to be settled. (See why the financial industry lobbied so hard for this?) Finally, note Five Cities Where Why Are People Barron's Buzz:
Houses Are Still Hoarding $9 Billion Gulfstream's New
that 300 years actually isn't a very long time against the backdrop of eternity.
Cheap in Old iPhones? $65M Best Seller

In the end, of course, the Duke of Norfolk did find a way to preserve his legacy
beyond the grave—because his perpetual trust was the first to fail.

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