The Volokh Conspiracy
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Are perpetual trusts unconstitutional (in five states)?
An interesting new article, Steven J. Horowitz & Prof. Robert H. Sitkoff (Harvard), Unconstitutional Perpetual Trusts, 67 Vand. L. Rev. 1769 (2014). "I never can be thankful, Mr. Bennet, for any thing about the entail" is the epigraph (from Pride & Prejudice, of course). The Second Amendment connection is that some of the relevant state constitutions say, building on an early North Carolina constitution, that
Perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed.
"Free state," as I've noted elsewhere, meant—here and in the Second Amendment—a country in which people had freedom (as opposed to a tyranny), and not a state of the Union free of oppression by the central government. And the theme of the article, which of course is otherwise far removed from the Second Amendment, is well captured in the Introduction:
The organizing principle of American succession law is freedom of disposition. American law embraces freedom of disposition, enabling dead hand control, to a degree that is unique among modern legal systems. But even within the permissive American tradition, freedom of disposition has never been absolute. American law protects a donor's spouse and creditors, allows for the imposition of transfer taxes, and imposes a handful of anti-dead hand public policy constraints, the most venerable of which is the Rule Against Perpetuities (the "Rule"). By requiring that all interests vest or fail within lives in being at the creation of the interest plus twenty-one years, the Rule puts a limit on trust duration of roughly one hundred years.
In recent years, however, a movement arose to repeal the Rule. Spurred on by a change to the federal tax code in 1986 that gave salience to long-term trusts in estate planning, lawyers and bankers have lobbied successfully for legislation in a majority of states to authorize perpetual (or effectively perpetual) trusts. The effect on practice has been profound. An empirical study, coauthored by one of us, found that through 2003, states that had repealed the Rule collectively experienced $100 billion more growth in their trust businesses than states that had retained the Rule. Because this finding is based on data that is now ten years out of date, and because it reflects only trust funds held by trustees that are federally regulated banking institutions, it understates the effect of validating perpetual trusts in current practice. Perpetual trusts are today an established feature of the estate planning firmament.
Yet little-noticed provisions in the constitutions of nine states, including in five that purport to allow perpetual (or effectively perpetual) trusts, proscribe "perpetuities." The North Carolina provision, which dates back to 1776, is illustrative: "Perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed." Is a statute that authorizes perpetual (or effectively perpetual) trusts constitutional in a state with such a provision? Should a court in a state with such a provision give effect to another state's perpetual trust statute?
Answering these questions, which is the project of this Article, requires an understanding of the meaning of "perpetuity" as that term is used in the state constitutions. The North Carolina provision, which was the template for most of the others, predates John Chipman Gray's canonical 1886 statement of the common law Rule by more than a century. It is not immediately obvious, therefore, how to translate the rhetoric of "perpetuity," as used in founding-era state constitutions, into a doctrinal limit on government power to authorize perpetual trusts. The cases are scarce and contradictory.
Given the "real and intense" competition among the states for trust business, the potential for these constitutional provisions to disrupt perpetual trust practice is of significant import. Nevada, which has been aggressive in its pursuit of trust business, provides an interesting case study. In 2002, proponents of perpetual trusts in that state recognized that the state constitution was a roadblock. So they sponsored a referendum to repeal the state's constitutional perpetuities provision. To their surprise, the referendum was rejected by a margin of sixty percent to forty percent. Nevertheless, in the teeth of this vote, the legislature passed a bill permitting trusts to endure for 365 years. Is this legislation consistent with the state's constitutional commitment, reaffirmed in 2002, to prohibiting perpetuities?
The remainder of this Article is organized as follows. Part II provides context by reviewing the rise and fall of the Rule Against Perpetuities and the meaning of "perpetuity" as a legal term of art across history. Part III surveys the state constitutional provisions on perpetuities, tracing them back to the 1776 Constitution of North Carolina. Part IV considers the constitutional prohibitions of "perpetuities" in light of their historical context, including the contemporaneous policy rhetoric and common law. Part V considers whether recognition of perpetual trusts is prohibited in states with a constitutional prohibition of perpetuities. We conclude that legislation authorizing perpetual or long-enduring dynasty trusts is constitutionally suspect in a state with a constitutional prohibition, but more modest reforms that approximate the common law Rule are permissible. We also suggest that the constitutional prohibitions reflect the kind of strong public policy that would authorize a court in a state with such a provision to refuse to apply another state's law authorizing perpetual trusts….