Provided by
Michael W. McGreaham
Attorney at Law
101 S. Capitol Blvd.
10th Floor
PO Box 829
Boise, Idaho
83701-0829
Tel (208) 345-2000
Fax (208) 385-5384
Committed to providing the highest quality estate planning legal
services for individuals, families and businesses.
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Since the advent of federal income, estate and gift taxation in 1916,
savvy Americans have sought legal counsel to maximize their tax savings
for as long as permitted by law. True, many of them have surnames like
Rockefeller, Ford and Kennedy, but just as many of them have surnames
like Smith, Jones and Endicott. This article will introduce the Rule
Against Perpetuities and then consider some fundamentals regarding
perpetual estate planning for your financial prosperity and your
familial posterity.
The RAP
Winston
Churchhill once described Russia as a puzzle wrapped in an enigma
surrounded by a mystery. Curiously, this is an appropriate description
of the Rule Against Perpetuities (RAP)…the starting point for any
consideration of perpetual estate planning. Tracing its lineage to
English common law, the RAP has confounded generations of law
professors, law students, law practitioners and laymen alike.
The RAP stands for the proposition that our legal tradition (a reflection of
social policy) disfavors and seeks to prevent property from being held
perpetually in trust, and therefore, voids any trust agreement which
does not end twenty-one years after a life in being, or one generation
from lives presently in being plus twenty-one years. In other words, our
legal system has traditionally sought to prevent citizens from
transferring, preserving and protecting accumulated wealth for their own
bloodline indefinitely. And the debate over whether this is a worthy
objective likely will continue indefinitely. Nevertheless, a growing
number of states are just saying “no” to the RAP and are enacting
legislation to repeal its application.
The RAP Repealed
States that have repealed the RAP include, Alaska, Arizona, Colorado,
Delaware, Idaho, Illinois, Maine, Maryland, Missouri, New Jersey, Ohio,
Rhode Island, South Dakota, Wisconsin and Virginia. In addition, Florida
and Washington have extended the so-called Wait and See period set forth
in their versions of the Uniform Statutory Rule Against Perpetuities
from 90 to 360 years and from 90 to 150 years, respectively. Residents
and qualifying non-residents of these states may create perpetual estate
plans to allow one generation of taxpayers to transfer, preserve and
protect its accumulated wealth for their own bloodline indefinitely, or
nearly so.
Financial
Prosperity
A proven
maxim of wealth accumulation is this: It is not how much you make that
matters, it is how much you keep. As the federal government finds more
and more creative ways to spend tax dollars, even before it collects
them, this maxim is more important than ever. While every citizen should
pay what is legally required, the United States Supreme Court has ruled
consistently that no citizen should pay more than is legally required of
them. Accordingly, proper perpetual estate planning may minimize federal
estate, income and gift taxation for multiple generations. Without such
planning, your wealth may be halved (or worse) in each generation
through multiple layers and forms of taxation.
Familial
Posterity
Assuming
your intergenerational wealth escapes unnecessary taxation through
proper perpetual planning, all may be for naught unless you protect the
inheritance both from your heirs and for your heirs. First, no one
values the worth of a dollar like the person who earned and paid taxes
on it. Second, inherited wealth has a tendency to attract problems, such
as divorces, lawsuits and bankruptcies.
This is
especially true if your wealth is distributed to your heirs either
outright or in chunks (e.g. different percentages or fractional shares
distributed outright at specified ages). On the other hand, an
inheritance held within a Discretionary Trust may be bullet-proof for
all practical purposes.
Generally
speaking, under a Discretionary Trust a Trustee of your own selection
administers and distributes your wealth for your heirs. Better yet, the
Trustee acquires legal title to assets and on behalf of the Trust for
the sole use and enjoyment of your heirs. In conjunction with special
Spendthrift Provisions within the Discretionary Trust, these assets are
then safeguarded beyond the reach of your heirs (e.g. squandering) and
their creditors. The Trustee can be a trusted family member, friend,
corporate fiduciary or any combination thereof. Furthermore, the terms
of the arrangement can be loosely or tightly drafted depending on the
degree of perpetual inheritance protection you want.
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Whenever someone lacking
financial maturity receives an outright inheritance, it is typically
good news for sports car (usually red in color) salespeople, travel
agents and high-end electronics dealers. Is that how you want your
hard-earned wealth consumed? And what about the potential long-term
damage to your heirs?
Andrew Carnegie, one of the wealthiest
industrialists of the late 19th century observed that “[t]he parent
who leaves his son enormous wealth generally deadens the talents and
energies of the son.” What can be done to avoid the perils of
inherited wealth? One increasingly popular antidote to this dilemma
(short of spending your kid’s inheritance, as the popular bumper
sticker proclaims) is the Incentive Trust.
Incentive
Trust Antidote
An Incentive Trust, as the name implies, is one
in which the Trustmaker sets standards of conduct or achievement that
must be met before distributions are made to or for the benefit of a
beneficiary of the Trust. These standards may include such incentives as
completing a certain educational level, becoming self-supporting through
gainful employment, volunteering for charitable causes supported by the
Trustmaker and even avoiding drug/alcohol abuse.
However,
Incentive Trusts may not include provisions that are considered contrary
to public policy. Such provisions include those that may disrupt family
relationships by encouraging separation or divorce, foster neglect of
parental responsibilities, prevent marriage and discourage the
performance of public duties. Otherwise, the scope of permissible
incentives is limited primarily by your creativity as the Trustmaker.
Communicate for Continuity
Effective
communication of your Incentive Trust objectives can help prevent future
litigation between your Trustee and your heirs, especially over the
requirements you establish for distributions. Some families hold
financial planning retreats for their intergenerational members to
communicate the Trustmaker’s objectives. At these retreats, family
members may prepare a written statement of their family values, a family
code of conduct and/or a family mission statement. Oftentimes, the
Trustmaker’s professional advisors attend the retreat and educate
family members about the investment, tax and asset protection benefits
of the Incentive Trust. This can help ensure the continuity of your
philosophy of wealth accumulation, management and distribution for
heirs. Alternative Antidote
Perhaps you are opposed to influencing the
behavior of your heirs after your death, but don’t want your wealth
subject to their squandering, divorces, lawsuits or bankruptcies. If so,
you should consider the Discretionary Trust alternative. The key to a
successful Discretionary Trust is selecting and entrusting a Trustee
with broad discretionary authority to protect your wealth for and from
your heirs. The non-fiduciary position of Trust Protector can be created
to appoint and even remove such a Trustee to ensure fulfillment of your
objectives, whether the Trustee is too generous or too restrictive. Summary
The
legal options available to encourage your heirs to use their inherited
wealth to live responsible and productive lives after your death exceeds
the reach of this brief overview. Accordingly, competent legal counsel
should be sought to explain and evaluate your options.
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