AgDM newsletter article, September 2003

To repeal or not repeal the rule against perpetuities

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

The new century is rapidly coming to be dominated by two developments - terrorism and the realization that the universal dismantling of important institutional structures can have devastating long-term consequences. The latter point has been dramatically made by the Enron debacle, the Andersen accounting fiasco, the Global Crossing bankruptcy, the Tyco problems and the general distrust at all levels of aggressive business strategies and tax shelter schemes. The message in all of this is critical: we should be very, very careful in dismantling important institutional constructs in the euphoria of the moment.

That’s what makes the argument that states should repeal the Rule Against Perpetuities appear out of touch with reality. Those urging repeal have dusted off the thread-bare and largely discredited arguments that the venerable Rule Against Perpetuities is no longer needed and should be jettisoned.

What the argument’s all about?

The basic issue is how long property can be tied up in trust. The Rule has come to stand for the proposition that interests in trust must vest, if at all, not later than 21 years after the last to die of a class of lives in being at the creation of the interest in trust. As a practical matter, that has tended to impose a maximum term of 100 to 125 years for property to be held in trust.

Complete repeal of the Rule removes the limits on how long property can be held in trust. With repeal, assets could be tied up 500 years, 1,000 years, indeed forever. Professor Lewis Simes, a well-known legal scholar of his era 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 which 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 in 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 during their usufruct.’”

To the above two reasons, a third can be added. 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 is 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. With the trust assets shielded from market forces, widespread ownership of assets in such dynasty trusts would almost certainly reduce the rate of economic growth. That could easily amount to 0.2 to 0.3 percent per year - with the damping effect possibly increasing over time.

For example, assume a couple with two children place $1,000,000 of property in trust in 2003. Further, assume the state in question is one of the dozen or so states that have repealed the Rule. What could be the consequences of setting up the trust to last forever?

And that’s only 500 years. In 1,000 years, it would clearly be unmanageable.
As the period of trust life lengthens, with millions of trust beneficiaries, a situation would be created where trust-owned property would be perceived in a manner similar to government-owned property. It would resemble the way beneficiaries view the social security trust fund, for example.

In conclusion

The Rule Against Perpetuities was developed for good reason; those underpinnings to the Rule haven’t changed in the centuries since the Rule was first articulated.

Many opponents of repeal are supportive of efforts to permit the reasonable accomplishment of educational and other objectives of property owners. Indeed, many are willing to lend support to proposals that would assure a trust duration of 150 years. That should be long enough to permit rational planning even with regular increases in life expectancy for at least the next few years.

* Reprinted with permission from the April 25, 2003 issue of Agricultural Law Digest, Agricultural Law Press publications, Eugene, Oregon. Footnotes not included.

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