The Patchwork of Perpetuities Periods

Analyzing the effect on generational trusts after the Wealth Wave

This is part of the Wealth Wave series, in which I examine problems at the intersection of intergenerational transfers of wealth and the creation of trusts to hold that wealth. For the first installment, click here.

Intro

The bane of many law students’ existence is the rule against perpetuities.  Originally designed as a way to make sure chains of present and future property interests would eventually vest into outright ownership under British common law, this rule has almost universal relevance for trust arrangements. 

The common law rule against perpetuities, in the realm of trusts, generally considered the trust beneficiaries living at the time a trust was created (whether by name or by class).  The death of the last to survive of these trust beneficiaries started the ticking of a clock, by which the trust had to terminate and “vest” property ownership in the hands of successor trust beneficiaries no later than 21 years after the start of that clock.  This usually meant conversion of title of trust property to fee simple or tenants in common ownership with respect to beneficiaries. 

Many states have extended the applicable perpetuities period, or at least changed it to a finite term for the existence of a trust that is not pegged to the lives of any beneficiary.  Some states went to 90 years.  Others went to as many as 1,000 years, or even abolished the perpetuities period entirely. 

And, in some states (especially Delaware), the exercise of a power of appointment could once upon a time reset the perpetuities period for a trust.  This had special transfer tax significance in the form of the “Delaware tax trap” described in IRC Sections 2014(a)(3) and 2514(d).  Many states now have savings provisions to avoid accidental triggering, or even completely abolish intentional triggering, of the Delaware tax trap. 

Given the decreasing significance of perpetuities periods, they are often ignored.  However, they have and will continue to have special significance.  In this article, we will examine some common scenarios where this becomes a concern. 

The Many Trusts Problem

One of my favorite childhood books was Many Moons by James Thurber. 

And, like the King in that story, perhaps I am making too much ado about the origin and timing of trusts.  Nonetheless, it is often the case that a family’s estate plan consists of many trusts.  And, each of these trusts may have a different applicable perpetuities period.  These differing perpetuities periods are often taken for granted. 

Let’s take, for example, a married couple with three children.  They created a SLAT in 2012.  One spouse died in 2017, and their assets were divided into a credit shelter trust and marital trust.  Then, the other spouse died in 2024, and their assets were divided into descendants’ trusts per stirpes. 

In addition, at the death of the surviving spouse in 2024, the SLAT, credit shelter trust, and marital trust were also divided into descendants’ trusts per stirpes. 

Among the three children, they have equal shares of 4 different pools of assets – the SLAT, the credit shelter trust, the marital trust, and the estate of their second parent to die.  This ends up in as many as 12 different trusts – 4 for each child. 

Common wisdom says that these trusts may be merged, assuming they have substantially similar terms, so that each child has one trust made up of their combined 1/3^rd shares from each of the 4 pools of assets.  Similarity of terms usually considers trusteeship, distribution terms, and powers of appointment.  Assuming these terms are consistent among the 4 different trusts for each child, merger is often given the green light. 

There is one term, however, that cannot be consistent – the perpetuities period.  Given the dates of creation – 2012, 2017, and 2024, we have three different perpetuities periods for each child’s trust.  Does this impede merger?  And, even if it does not impede merger, what trickle-down effects might it have for issues such as powers of appointment and the trustee’s accounting duties? 

Uniform Trust Code Approach