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Many U.S. attorneys and financial planners continue to recommend that their clients create perpetual trusts, frequently referred to as “dynasty trusts.” While there are a number of reasons that might propel an individual to create such a trust, the primary motivating factor has been to avoid the federal generation-skipping transfer tax on the assets of trusts for later family generations. Spurred by this method of tax avoidance, a cottage industry in perpetual trusts has come into being. It’s reached sufficient scale that many of the states in the United States interested in competing for this trust business have eliminated their rules against perpetuities (RAPs)1 to permit the creation of perpetual trusts within their boundaries. These new statutes are overturning some 300-plus years of statutes and common law precedents in England and the United States founded on the principle that trusts for individuals, as opposed to charities, shouldn’t be permitted to last indefinitely.
I believe that this emphasis on tax saving as the motive for the creation of perpetual trusts and the resulting changes in statutory and precedential law to meet this motive have frequently obscured critical thinking by planners and trust founders on how the lives of the beneficiaries living within such trusts will be affected by their existence and how society as a whole may view the existence of such trusts. Planners and founders should consider these issues in determining how the perpetual trusts they’re intending to create could be of the greatest benefit to the individuals for whom the trusts are being created.
History of Perpetual Trusts
The trust, as we know it, evolved in England and on the European continent, particularly in France, out of the Roman idea of “use.” This legal concept provides that an individual may have the use of a thing, or res, for a period of time without also having the underlying ownership of that thing. This idea took root in the English and French common laws as the trust and, by the time of the Crusades, was well established in land titles. At that time, the law made no distinction regarding the terms of trusts, thus permitting trusts to last indefinitely or, if you will, perpetually. Rather quickly, the nobility of England and France saw that by placing their lands in perpetual trusts, they could, theoretically, perpetuate their class position indefinitely. It therefore became common practice, and a large amount of land in England and France became perpetual trusts.2
Unfortunately for the economics of the countries where this system developed, there were two unintended consequences. First, the land in trust often couldn’t be alienated even though the noble family had need of money or in some cases had disappeared. Second, such lands were often poorly administered as they had no owner who cared about their improvement because he would never own them outright. Many life tenants sought to receive the maximum annual return possible without regard to such a policy’s long-term effect on the land’s productivity. The result of these unintended consequences was that a portion of wealth in England and France was seen by its rising commercial classes to be wasted. Equally, those who had money and the creativity of an entrepreneur were frustrated as they couldn’t buy and improve this land, thus further exacerbating the perceived negative effect of the perpetual trust on the economy.
In addition, the suspension of vesting of property, as a result of perpetual trusts, often led to certain members or even whole generations of noble families becoming trust funders and falling into the same lassitude or remittance addiction as we often see today in some of the third and fourth generation members of the great families of 19th-century industrial America. Often then, as now, the cause of this lassitude resulted from the fact that no member of that family ever owned or would own the capital locked up in the trust from which he received his monthly stipends nor would any family member ever be required to learn to manage those assets. In fact, work in commerce of any kind was seen as beneath the dignity of such personages.
The result of these perpetual trusts in England was that by the end of the 17th century, lawyers, merchants and economists saw the perpetual trust as a substantial drag on commerce (because so much land couldn’t be purchased or sold) and as an abuse of the original idea of a trust—a period of suspension of ownership while another used something that could be beneficial to commerce. The result of these concerns was the adoption in England, in the late 1600s, of the RAP. At the time the RAP was adopted, first by case law and then by statute, lawyers, judges, economists and parliamentarians saw it as a great reform.
The history of the perpetual trust in France is also instructional. France had, historically, a well understood perpetual trust provision. France, however, until the Revolution in 1789, made no such reform as the English made with its RAP. In France, the absence of such a reform and the resulting restriction on the growth of France’s economy, caused by the inability to purchase and sell land, slowed its development as a modern economy. The perceived abuse of the economy, through the use of the perpetual trust by the nobility, was seen by Napoleon and the jurists who advised him to be so serious that in 1805, Napoleon eliminated the trust altogether in France. Today, a number of French lawyers are attempting to reintroduce the trust through a legal entity called the “fiducie,” as they feel that the lack of this vehicle has held back their clients’ ability to properly plan their estates. Interestingly, none of the advocates of the fiducie are suggesting that such an entity be perpetual.
So, what can we say historically about perpetual trusts? At one time in the evolution of the law of trusts, the perpetual trust existed and had a history that we can study. That history shows that such trusts were perceived by society to have had a significant negative impact on the marketplace and to have perpetuated a non-productive class of people. As to the first of society’s objections to the perpetual trust, there’s no doubt about such trusts’ historically negative impact on land sales and acquisitions.3 As to the second, the histories of France (and Russia too) haven’t been kind to a class of individuals whom society perceives as never needing to earn their own living and have been particularly unkind to those who enjoy such a status just because an ancestor whom they often never even knew created a perpetual trust for his descendants.
Three Issues
Turning now to the issues affecting the life of a beneficiary of a perpetual trust, let’s look at three issues that wouldn’t typically be the first thoughts in the minds of tax planners but are often the first thoughts of caring professionals concerned about the long-term effects of their actions on the lives of their clients, on the families of which they’re a part and on the systems within which they live and operate. Let’s consider:
• Werner Heisenberg’s law of unintended or unexpected consequences;
• the interest of society in the outcomes of the individual decisions of its members and society’s ability to impact those decisions; and
• the Second Law of Thermodynamics, that is, the law of entropy.
Unintended Consequences
Heisenberg suggested that modern physics informs us that there are often unintended or unexpected consequences of acts the universe performs. Increasingly, modern economists, social scientists and psychologists are seeing this same reality in their fields and applying Heisenberg’s principle to them. The ancient Greeks understood this reality long before Heisenberg and his modern disciples and expressed it when they were preparing young men and women to enter the service professions by admonishing them to “do no harm.” The ancient Greeks recognized that rushing to do good before understanding the whole system and all the issues within it that relate to the problem attempting to be solved often led to doing more harm than good. I would synthesize Heisenberg and the Greeks by suggesting that as there are often unintended or unexpected consequences of what we do, and some of what we do may do harm, we begin any planning project with the rule “first be sure to do no harm before you attempt to do good.”
This rule is particularly applicable to the creation of a perpetual trust. Why? Because the planner is mortal, and the trust he’s creating is theoretically immortal. Certainly, in such a case, many questions regarding the natures and experiences of the descendants of the trust’s founder, and the environment in which they and the trust exist, will not only not be known or discernible by the founder but also won’t be known or discernible by the planner. The planner in assisting the founder in creating such a trust must recognize that he’ll be significantly impacting the lives of each of the trust’s beneficiaries, as each beneficiary in turn integrates the trust’s existence into his own. It ought to be a humbling experience for trust planners and trust founders to imagine what life might be like for these beneficiaries even just two or three generations from those alive today, much less the seventh, eighth and ninth and those generations thereafter. Perhaps the admonition of the Iroquois elders to each other as they began important tribal work that “it should be our hope that the members of the tribe seven generations from now will honor us for the care and thoughtfulness we exercise in our decision making today,” would be helpful to planners and founders of perpetual trusts as they begin their work. Rightly, the creation of a perpetual trust affecting so many generations of a family ought to be done and entered into with great humility and plenty of patience.
Moving to planning for a perpetual trust’s creation, I strongly suggest that every planner carefully consider all the possible impacts the trust may have on the lives of its beneficiaries, particularly its unintended consequences, and bring those thoughts to the attention of the trust’s potential founder. By so alerting the trust’s founder, the planner will be trying to eliminate the negative impact the trust might have on these beneficiaries and meet his highest responsibility to the founder and the beneficiaries to do no harm. Strangely, in the rush to get the tax work done and to get the papers out, all too often I observe that the trust’s impact on the lives of its beneficiaries is never discussed. This failure to take the time to consider these issues may be, from the founder’s standpoint and his intention to benefit the beneficiaries by enhancing their lives, the greatest unintended mistake because it may lead to the creation of a trust that diminishes the lives of its beneficiaries. Should such a result occur, the founder would have been deprived by the trust’s planner of the advice he most needed in attempting to accomplish his enhancement goals.
We as planners owe a duty to our clients to bring all the issues that may impact a client’s decision to that client so that he may make the most informed decision.
Society’s Interest
As I noted earlier, English, French and Russian societies at earlier periods of history found the perpetual trust and the perpetual leisure or non-working class it created unacceptable. In the United States, that same anxiety about the existence of such a class led to the adoption, in the Colonies, first by the inheritance of the English common law and then by individual state statutes, of the RAP. These statutes expressed society’s view that the suspension of the ownership of property perpetually was an unacceptable hindrance to the economy and to the movement of wealth within society as a whole. The RAP may also express a concern in society as a whole about a perpetually landed class that didn’t need to work. This history exists and, in the case of France and arguably Russia, helped lead to revolutions.
I believe it’s our duty as planners to advise our clients of these histories so that they may consider all points of view before acting to create an entity that, at other times in history, certain societies have seen as unacceptable. I believe it’s also important to consider that no society in history has ever accepted within its midst a perpetually leisured or non-working class. As a historian and amateur sociologist, I cringe when I see those masterful statistical analyses created by trust planners projecting the enormous build-ups of wealth within these perpetual trust entities, all designed to encourage potential trust founders to get on with buying such a product from the planner. I wonder whether the planner is currying favor with the founder’s ego by suggesting the creation of such a monument to the founder and all the while disguising this fact by suggesting how happy the beneficiaries will be.4 In any event, the history of the evolution of modern human societies and their children, and the cultures and civilizations formed within them, shows that society has never permitted such monuments to last very long; this has all been reflected in the history of the rise and fall of families and dynasties. I suggest that society, like biology, seeks creation and change to meet new circumstances and allow new forms of community to arise—as Heraclitus said, “Everything is in flux.” I suggest that society dislikes the profound order found in monuments. Given this history, society’s concerns have to be taken into account in guiding founders on the long-term likelihood that their planners’ projected monumental financial results will turn out to be true.
The Law of Entropy
This law of physics reminds us that everything that’s material will, over time, be frictioned away by entropy. Physics teaches that energy forms materiality, and materiality through the action of entropy dematerializes back to energy. I’m not a physicist, and I apologize to the readers who are for paraphrasing this deeply complicated concept; however, I hope they’ll accept it as sufficient for other non-physicists to appreciate what entropy is and how it works. What does the law of entropy have to do with perpetual trusts? I believe everything because it suggests that anything man-made that we believe is perpetual is an illusion, a mirage or whatever other term for false vision you may prefer. This law of physics teaches us that nothing is perpetual except perhaps the never-ending process of energy in flux; order to chaos to order to chaos indefinitely.
Planners who suggest to clients that the creation of a perpetual trust is a monument that will endure forever are pandering to their clients’ worst instincts. Rather, bringing the law of entropy into the conversation brings both planner and founder back to humility and the awareness that in their work together, they must be sure they’ll do no harm before they try to do good.
I can’t urge strongly enough that planners bring before and discuss with potential founders of perpetual trusts the following three important realities:
1. There will be unintended consequences of this perpetual trust. Have we considered as many possible outcomes of the creation of this trust as we can imagine with our greatest focus being on those that may decrease rather than those that may increase the pursuits of individual happiness of the beneficiaries of the trust?
2. Society will have a view about and an impact on this perpetual trust. Have we considered what society’s view and impact might be, and have we considered it not just from the viewpoint that society is adverse to what we may first perceive as our goal of having a trust last perpetually but that perhaps society may have a valid point of view that might cause us to modify how we go forward? Have we at least considered that society as a system will in some way impact and even constrain our goals of having a trust last perpetually?
3. The law of entropy is alive and well and informs us that nothing material is forever. Have we brought this law of physics into our consciousness as we plan, and have we imagined how it will impact the life and operation of the perpetual trust?
Arguably, most of the impacts of the three core questions set out above appear to be external forces bearing on the founder’s decisions regarding the perpetual trust. I would argue, however, that the most significant risk to the success of a positive perpetual trust (which I define as a trust that over a long period of time actually enhances the lives of its beneficiaries) is internal. It’s the risk that because of a lack of internal governance of the relationship between the beneficiaries and the trustees, the trust won’t enhance the lives of its beneficiaries but rather will diminish them. I suggest the problem lies in an astute observation by Walt Kelly’s comic strip “Pogo” about much of the dysfunction in human behavior, which is, “He went searching for the enemy and found it was us.” That is, the planners and founders of the trust and the beneficiaries themselves are the cause of the failure of the trust to enhance the lives of its beneficiaries.
In my practice, it’s common to meet beneficiaries of trusts who tell me that the trusts have been a net negative in their lives. In my earlier book, Family Wealth, Keeping it in the Family and in two papers, “The Trustee as Mentor,” published in the Chase Journal and “The Trustee as Regent Within a Family Governance System,” co-authored with Patricia M. Angus, I discussed at length the issues faced by trust beneficiaries. In those works, I pointed out that the relationship between a trustee and beneficiary is like an arranged marriage because neither chooses the other when the relationship is formed. Such relationships are often volatile and not ones we would choose if given a chance. In these relationships, it’s rare to find a beneficiary who has any training on how to be an excellent beneficiary. It isn’t, therefore, surprising that most beneficiaries don’t govern this relationship well. Often, in fact, the beneficiary has no real understanding of the roles and responsibilities he’s to assume as a beneficiary and will be expected to perform in the beneficiary/trustee relationship.
In my experience, the beneficiary almost never understands that he’s expected to comprehend that at the heart of this relationship is the concept that he should control this relationship without owning the underlying assets. Separate from the relationship difficulties and often much more serious is the very real possibility that the beneficiary will fall victim to becoming “remittance addicted.” This is a state of life in which an individual’s human and intellectual capitals are in entropy. It’s the life of a beneficiary of a trust when the individual is unable to imagine, metaphorically, a life without the distribution from the trustee at the beginning of the month. Such individuals are seen by the psychological profession as exhibiting the same dysfunctional characteristics as individuals addicted to alcohol, drugs or gambling.
Anyone who’s addicted is by definition not free. It’s hard to imagine that any founder of a perpetual trust, making a gift of love by transferring his ownership of financial capital into the care of a trustee for the purpose of enhancing the lives of the trust’s beneficiaries, would choose to create an entity that might create exactly the opposite effect and outcome. Every trust, perpetual or with a fixed term, carries with it the risk of this outcome for its beneficiaries. Planners who are seeking to truly guide their clients will always offer this enlightened and educated view of the possible outcome of trusts. The sharing of such views is particularly important in the case of perpetual trusts because the laws of demographic probability suggest that there will be a geometric increase in the possible beneficiaries of such trusts in each later family generation. Thus, through the normal birth rates expected within families, such trusts are more likely to spawn such remittance-addicted individuals than fixed-term trusts because more people over time will be exposed to the possibility of becoming so addicted. The potential founders of perpetual trusts are entitled to be made aware of this potentiality.
Another reality of trusts is that many beneficiaries:
• don’t feel worthy of the gift of being a beneficiary;
• find the trust a hindrance to their development, to their sense of how free they are to make their own life choices; and
• find the trust a hindrance to their sense of self-worth.
Many beneficiaries feel that the trust saps them of creativity and of the excitement of creating something of their own. They sincerely wonder who they might be if the trust didn’t exist. Would they be happier, and would they be more proud of their own unique abilities and gifts? In addition, they feel beholden to someone they’ll often never meet, whose history they’re expected to admire, appreciate and emulate. “Why,” they say, “when it’s only through a DNA shuffle that they bear any relation to him.” In fact, they may be embarrassed by the founder’s history while being locked into it by the trust.
Yet another reality of trust life is non-mentoring as opposed to mentoring trustees. Many trusts fail their founders’ hopes that they’ll enhance the lives of their beneficiaries because the trustees themselves go into entropy. Often, trustees fail to change with the times and instead bring outdated thinking to new problems. Even worse, some trustees begin to see themselves as the real owners of the trust’s property and start acting as if they’re the founder’s alter ego rather than the beneficiary’s representatives. They begin to believe they know better than the beneficiaries how the beneficiaries should live their lives. They become unchosen parents and, even worse, autocrats, when in reality, their role is to serve the growth and development of the beneficiaries as human beings and as intellectual individuals. Too often and especially in the later years of a long-lived trust when the founder is long dead and the trustees never knew him, the trustees begin to identify themselves and their stations in life by the trust’s assets and start doing and acting accordingly, forgetting that they’re the servants of the beneficiaries and of future generations of beneficiaries to come.
Trust Governance
Thoughtful planners who suggest the formation of perpetual trusts and the founders who create them will realize that there’s a heightened possibility of failed trust governance when the relationship between the beneficiaries and the trustee will last for an extended period of time. All trust governance is at risk of failure on the beneficiary side by the beneficiary becoming remittance addicted and on the trustee side by the trustees falling into entropy and self-dealing. Unfortunately, when a perpetual period is chosen for a trust, these risks are heightened because there’s simply more time for the law of entropy to work its will in the beneficiaries’ and trustees’ negative experiences of the trust and of their relationship with each other. Happily, today enlightened planners have an armamentarium of planning antidotes to protect beneficiaries and trustees against failed trust governance.
Failed Trust Antidotes
I believe the most important antidote to failed trust governance is selecting mentoring trustees who’ll actively work with the beneficiaries to achieve the founders’ goals of enhancing the beneficiaries’ lives through the growth of their individual human and intellectual capitals. Unfortunately, nothing will protect beneficiaries from themselves if the law of entropy acting through the trust’s negative forces has made them dependent individuals, a process that non-mentoring trustees will always accelerate.
Mentoring trustees working to create excellent relationships with their beneficiaries and beneficiaries working to become excellent beneficiaries in managing their relationships with their trustees have a real chance of success. It’s in the good management of these relationships that the trust’s purpose to enhance the lives of its beneficiaries has a reasonable prospect of success. As the trustees and beneficiaries begin this process of self-government, what are some of the outcomes that might be considered so that the trust, whether perpetual or fixed term, will provide the greatest enhancement for the lives of its beneficiaries? Beneficiaries and trustees should begin by recognizing that philosophy teaches that each beneficiary has goals of high value and purpose, including: becoming fully self-aware and achieving personal freedom so as to be able to live an independent life; achieving the fulfillment of his life’s dreams through knowing and fulfilling his calling; and being able to take full responsibility for his actions.
Every effort by the trustees and the beneficiaries should be geared towards achieving these results for the beneficiaries if the trust is to meet the founder’s original goal that the trust enhance the life of each of its beneficiaries. I worry that in a perpetual trust, the beneficiaries may ask why they should worry about becoming excellent beneficiaries and about trust governance and do all the hard work of making this relationship work, if neither they nor their children nor descendants, in any generation, will ever own the assets? Why should they try to learn to be good stewards? Why should they work, be an apprentice or find a calling when they can do nothing? Who’ll ask the beneficiary the questions that will help him understand that these questions must be answered if he’s to achieve a full share of independence and self-worth? Let’s hope that founders will be alerted to these questions and realities by their planners and provide conditions for their beneficiaries within their trusts that raise these questions and select trustees who are prepared to engage with the beneficiaries to help them find individual answers that will lead to their trusts enhancing the beneficiaries’ lives as they intended.
Perpetual trusts, as do all trusts, have the capacity to enhance their beneficiaries’ abilities to become self-aware and independent; to seek a calling; and to be able to take full responsibility for their actions; or to do nothing and become dependent with all the sadness such entropic lives engender. I’m particularly concerned, however, about perpetual trusts because their earlier history suggests they may have a greater risk of leading to dependence than fixed-term trusts. Whether my concerns will become reality will only be known many years from now when the second and third generations of beneficiaries of such trusts take their places. Thoughtful giving begins with carefully considering whether a gift will do harm and then after considering its possible harmful effects, whether it will do good.
—A previous version of this article was published in The International Family Offices Journal.
Endnotes
1. The typical rule against perpetuities as cited in Scott and Asher on Trusts, Aspen Publishers (2006), at 62.10: “No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest....”
2. While not the subject of this article, the perpetual trust was widely used by the Church to hold its land until in certain parts of England and France the Church became the largest land owner. As Europe’s business environment modernized in the 15th and 16th centuries, this fact caused much dissatisfaction with the Church’s secular rather than spiritual role. The resulting stultification of commerce, land being its principal medium, was seen by the Tudors in England as highly prejudicial to England’s development. As a result, many people in the economic classes warmly welcomed Henry VIII’s decision as part of his “Reformation” to sequester and redistribute church property as a necessary reform needed to accelerate the development of England’s economy.
3. I’m aware that some readers may feel that this history isn’t applicable to the modern economic environment in which wealth is represented far more in movable than immovable property. This article isn’t the place for an economic debate. I’ll observe only that the trustees of nearly every trust are required by the state laws that govern trusts to be “prudent in the investments they make of the trust’s assets.” Equally, they may make no investment that isn’t prudent. Creativity is defined, in the commercial area, as entrepreneurial and is all about taking risks. I believe that creativity and the risks it entails isn’t included within these state law definitions of prudence and rightly so because it’s someone else’s assets that the trustee is administering. This reality proves unfortunate over time for trust beneficiaries. Why? Because it’s a simple fact of the law of competitive risk and reward that, over time, the trustee carrying out his responsibilities to be prudent can’t take the risks that an entrepreneur using his own resources can take, and so, over time, the return achieved by the trustee in competition within the marketplace with all other investors should and will be less. This logic carried out over the multiple generations assumed by a perpetual trust suggests strongly that, assuming the market is neutral, a trust’s assets will fail to grow at the same rate as the market as a whole. Should this logic be true, then such trusts will eventually find themselves in the same negative position commercially as those that owned but couldn’t trade in land.
4. I also wonder whether these planners have studied Aristotle’s view of how difficult the journey is for Western man to be happy and how much of that journey is about knowing one’s self, finding useful work and calling and living out one’s own dream, and how little is about inheritance of other dreams as reflected by such monuments? I suggest Confucius, Socrates, the Buddha, Gandhi and many 20th-century figures like Jung, Maslow and Erickson also have much to say about this journey, each of whom in his own way comes to much the same conclusion about which processes enhance people’s lives and which diminish them.