The Ins and Outs of Trusts That Last Forever

MOST people struggle to plan their financial futures beyond the next decade, while those with money and foresight are likely to think well in advance about what they want to leave their children, grandchildren and even great-grandchildren. But what about planning for eternity? It seems too long to contemplate.

Yet in the last several decades, states have begun competing with one another for the business of perpetual trusts, which are designed to last forever, or at least 1,000 years in the case of Wyoming.

And people have been putting their millions and billions into them, eschewing traditional trusts, which typically end after 100 years.

The reasons are both dynastic and technical. They allow trust creators to maintain some control beyond their lifetimes. And they help protect the fortunes from taxes and creditors. (States benefit from the fees and taxes they can charge the owners of the trusts.)

But now a Harvard Law School professor, Robert H. Sitkoff, has written an academic paper making the case that perpetual trusts are unconstitutional in some of the very states that have tried hardest to persuade people to establish them.

Even people who set up perpetual trusts in states where they are legal could find themselves in trouble: Lawsuits brought in a state where the trusts are prohibited could result in those out-of-state assets being counted in any settlement, he said.

“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.”

Put another way: All of those carefully worded and very sophisticated documents, whose drafting cost clients tens of thousands of dollars in billable hours, may not accomplish what they intend.

A bit of history first. Perpetual trusts have existed for charitable purposes all the way back to Benjamin Franklin and John Adams. Up until recently, 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 — typically about 100 years.

The first state to allow perpetual trusts (that is, with no time limit) that were meant to preserve family wealth was South Dakota in 1983, followed by Delaware in 1995. By the 2000s, the practice took off.

In addition to creating a legacy to last for the ages, perpetual trusts do not have to make distributions — say, on someone’s 40th birthday, when he could be embroiled in a lawsuit — or end at a specific time.

“By never requiring a trust to be distributed to a beneficiary, you’re protecting those assets for future generations,” said Gail Cohen, vice chairman and general trust counsel at Fiduciary Trust. “If you create a trust that says when the beneficiaries turn 35, give them half, you don’t know what is going to be happening to them at what age. They could be in a messy divorce.”

If these trusts are set up properly, they can grow without tax liabilities as they are passed between the generations.

Critics of perpetual trusts have argued against them on moral grounds — saying tying up money for generations is bad public policy and could lead to a virtual aristocracy.

But Mr. Sitkoff is taking a new tack by questioning their legality.

In the paper, “Unconstitutional Perpetual Trusts,” which will appear in the coming issue of The Vanderbilt Law Review, Mr. Sitkoff and his co-author, Steven J. Horowitz, an associate at the law firm Sidley Austin, argue that legal challenges to these trusts could come from two sources: creditors in a state where the trusts are unconstitutional who are seeking ways to maximize their settlements and view the trusts as large sources of money, and descendants who want to break the trust and get their money now and without strings attached.

Nine states constitutionally prohibit perpetual trusts: North Carolina, Tennessee, Arkansas, Oklahoma, Texas, Arizona, Nevada, Wyoming and Montana. But five of those states have designed legal workarounds that permit them to exist with certain limitations.

Nevada, for example, which has been aggressive in attracting trust business, tried to change its constitution to allow perpetual trusts in 2002, but voters rejected it. The state settled instead for trusts lasting 365 years. But Mr. Sitkoff asked if even that was constitutional.

“It’s a matter of degree,” he said. “It’s like ‘if I shoot you 10 times’ is a stronger case than ‘if I shoot you twice.’ The prosecutor is still going to win the ‘I shot you twice.’ Three hundred sixty-five years is longer than the existence of the United States.”

Mr. Sitkoff’s paper might roil the waters in trusts touched in some way by these nine states — either by people who live there or people who have set up trusts there. A simple example is a divorce case in Texas in which the spouse being sued has the bulk of his assets in a trust in Delaware. The court in Texas does not have jurisdiction in Delaware, but it could count those assets as part of the marital estate and order the man to pay half of them to his wife, Mr. Sitkoff said.

Another example might be two children who inherited their parents’ wealth in a perpetual trust but did not want to abide by the distribution rules. They could argue that the trust was invalid, and if there were no fallback provisions in the estate plan, it would be as if their parents had died intestate. At that point, the assets would simply be split between their heirs.

“Every trust that was created under the authority of one of those statutes is vulnerable,” Mr. Sitkoff said. “There’s a very powerful argument that the courts in those states will decide.”

(So far there, has been only one state case on the matter, Brown Brothers Harriman Trust Company v. Benson in 2010. It focused on a single issue and was decided by an intermediate level court in North Carolina.)

With billions of dollars at stake, not everyone agrees with the professor’s position.

Richard W. Nenno, senior managing director and trust counsel at the Wilmington Trust Company, which is based in Delaware, where perpetual trusts are legal, said clients who lived in Texas, where these trusts are unconstitutional, could get around any problems by moving as many assets as possible to Delaware and appointing trustees in Delaware to oversee the trust.

“You want to minimize your ties with Texas,” he said. “If you do that and questions come up, the Delaware courts are going to be the courts that say the trust rules apply and the trust is perfectly valid.”

It is on this point of states’ rights that Nevada would most likely defend its trust business. “I don’t see a scenario how the Nevada courts would compel a trust company in Nevada to recognize another state’s assertion of jurisdiction,” said Greg Crawford, co-manager of the Alliance Trust Company in Reno. “We’re pretty protective of our industry.”

Yet even the possibility of such a fight carries costs, and that might make people rethink their reach for immortality — or at least where they make that reach.

But if they have already set up a trust, what steps can they take to fix it? A person who has set up a perpetual trust in a state with conflicting law could petition the state court for guidance on the matter, Mr. Sitkoff said. The person could also move to a state without the conflicting law. Or that person could simply hope no one challenges the trust

That is not the most reassuring advice for someone with millions of dollars at stake.