AgDM newsletter article, August 2000

Repealing the rule against perpetuities

Neil Harlby Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture, professor of economics, 515-294-6354, harl@iastate.edu

In the seventeenth century, the courts of England confronted, head on, what they saw as a threat to free market economics. Most of the wealth of that era was in land. The landowners were trying to tie up land to prevent future generations of heirs from selling the assets or squandering the family wealth. The courts concluded, correctly, that if the current generation could tie up assets with a string of life estates, preventing future generations from selling, it would hinder the operation of land markets. In effect, there wouldn't be much land available for sale. Keep in mind that this occurred while the discipline of economics was in its infancy but it represented forward looking thinking about what was good for the economy.

Because of the concern, the "Rule against Perpetuities" emerged. The basic idea was that one could set up property in trust to last for the duration of a class of lives (such as all of my children and grandchildren living at the time of my death) plus 21 years. That put a limit on how long property could be insulated from market forces.

Now, driven heavily by competition (about 10 states have moved to repeal the Rule, in whole or in part) there is a move to repeal the Rule Against Perpetuities in Iowa. Repeal would be a big economic move for the state. In the opinion of some, myself included, it would be a disaster, long-term, to repeal the Rule.

Major reasons not to repeal the Rule

Professor Lewis Simes, a renowned legal scholar of the twentieth century, articulated two reasons for the Rule in contemporary society.

"First, the Rule Against Perpetuities strikes a fair balance between the desires of members of the present generation, and similar desires of succeeding generations, to do what they wish with the property which they enjoy…. In a sense, this is a policy of alienability, but it is not alienability for productivity. It is alienability to enable people to do what they please at death with the property that they enjoy in life. As Kohler says in his treatise on the Philosophy of Law-

'The far-reaching hand of a testator who would force his will on distant future generations destroys the liberty of other individuals, and presumes to make rules for distant times.'"

"But in my opinion, a second and even more important reason for the Rule is this. It is socially desirable that the wealth of the world be controlled by its living members and not by the dead. I know of no better statement of that doctrine than the language of Thomas Jefferson, contained in a letter to James Madison, when he said: 'The earth belongs always to the living generation. They may manage it then, and what proceeds from it, as they please….'"

To the above two reasons, I would add a third. It is an article of faith that economic growth is maximized if resources are subject to the forces and pressures of the market. Prices emanating from free, open and competitive markets are the best way to allocate resources and to distribute income if economic growth (and per capita incomes) are to be maximized. Without question, repeal of the Rule would tend to insulate assets from the market. Over time, this could be a highly significant factor and would almost certainly slow economic growth. As an example, where would the venture capital industry be today if the bulk of the wealth had been put in perpetual trusts in the year 1,000?

Additional reasons not to repeal the rule

Repeal of the Rule would undoubtedly place increasing amounts of wealth in the hands of trust companies. In 500 years, even in 100 years, the proportion of wealth held and managed by banks and trust companies could well be sharply higher than the sum now held (more than half a trillion dollars in value at present). In 100 years, with the trend in bank consolidation, there could well be no more than a dozen banks worldwide, possibly fewer than that. Is it prudent to set in place rules permitting a huge amount of Iowa wealth to be held and managed in New York? Or Hong Kong? Or Tokyo? Or Beijing?

With no limit on so-called dynasty trusts, the number of beneficiaries could become unwieldy, to say the least. As one national legal group has stated-

"Over time, the administration of such trusts is likely to become unwieldy and very costly.
"Government statistics indicate that the average married couple has 2.1 children. Under this assumption, the average settlor will have more than 100 descendants (who are beneficiaries of the trust) 150 years after the trust is created, around 2500 beneficiaries 250 years after the trust is created and 45,000 beneficiaries 350 years after the trust is created."

Remember that that is only for 350 years. Trusts could last for 1,000 or 5,000 years or even longer. Indeed, trusts could last forever if the Rule is repealed.

In conclusion

Repeal of the Rule Against Perpetuities has implications far beyond elimination of a musty legal rule from the 17th Century. Repeal would remake a significant part of the framework governing property ownership and use in ways that are far removed from what has served us well. Repeal of the Rule would be foolhardiness writ large.

I would urge Iowans to resist the pressure from those who perceive a short-term gain from the repeal (and who would like to counter the competitive pressures from the states that have repealed the Rule). This country was not built on dynasties. Indeed, this country was established under principles that eschewed dynasties. It is not in the best interests of this or future generations to allow assets to be committed to a passive regimen which can lead to untold mischief in 500 years, not to mention 5,000.

 

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