The Rule Against Perpetuities is a long-standing rule in U.S. common law that discourages a person from controlling real estate long after that person dies. The rule basically prohibits interests in land that vest more than 21 years after the death of an identifiable individual living at the time the interest was created.

One of the most poignant moments in the new George Clooney movie, "The Descendants," is when Clooney, who plays the attorney Matt King, gazes down at a pristine sweep of coastland on Kauai. The land has been owned by the King family for generations. A descendant of Hawaiian royalty, King holds the deciding vote in the family trust that holds the land. He's torn over whether to go along with other members of his family who want to cash out by selling the land to real estate developers. Rooted in history and law, similar decisions have been faced by a number of Hawaiian families in recent years.

Randall W. Roth, professor of law at the University of Hawaii, provided information on trusts and the Rule Against Perpetuities to the makers of "The Descendants." The information provided by Roth helped build the film's plot, as George Clooney's character must decide what to do with a trust that must be wound down at a particular date following the Rule Against Perpetuities. The storyline has similarities to the trust issues that surrounded the trustees of Hawaii's Campbell Estate a few years ago. The 107-year-old trust was set to dissolve in January 2007, following the Rule Against Perpetuities and the terms of the trust. Some heirs opted to roll their assets into a new national real estate entity, while others took large cash pay-outs.

A number of states (28 and the District of Columbia), including Michigan, have abolished their Rule Against Perpetuities. Therefore, trusts established in those states can have perpetual (or extended) terms. Perpetual (or extended term) trusts are commonly known as "Dynasty Trusts". At least for 2012, a grantor can gift up to $5.12 million ($10.24 million for a married grantor) to a Dynasty Trust. This gift would be both gift tax free and generation-skipping transfer ("GST") tax free. As such, the assets in the Dynasty Trust (plus the appreciation thereon) will never be subject to estate taxes again! An added benefit to a Dynasty Trust is that it protects its beneficiaries from their inability, their disability, their creditors, and their predators, including ex-spouses, while keeping the trust property in the grantor's bloodline.

It should be noted that as part of President Obama's 2012 budget proposal, it has been recommended that the length of time Dynasty Trusts should continue to remain estate tax free should be limited to 90 years, which is roughly equal to the length of time specified by the common law Rule Against Perpetuities. So, while under state law a Dynasty Trust could theoretically continue forever, under the President's budget proposal the trust would become subject to estate taxes after 90 years.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

In PLR 2012-02-042 (released on January 13th), the deceased (call him Ed) left his IRA to a joint revocable trust established by him and his wife (call her Linda). At the second death, the trust divided into separate conduit trusts (RMDs only), one for the couple's daughter (call her Veronica) for 23% and another for their grandson (call him Michael) for 77%. As it turned out, Linda survived Ed by only 11 days. To avoid having to use Linda's remaining life expectancy for the stretch-out, Linda's executor disclaimed her interest in the trust. That was a good move. But, because the living trust itself was named in the beneficiary form (and not the conduit subtrusts for Veronica and Michael) the IRS confirmed that Veronica's life expectancy applied to both her and Michael's stretch-outs. This mistake probably cost Michael anywhere from 20 to 30 years of tax deferred compounding on his 77% portion of the IRA. For the correct way to name trusts in the beneficiary form so that each beneficiary can use his/her own life expectancy, see the second model provision on page 6 of the author's brochure: The
IRA Beneficiary Designation Form: How to Complete it Properly.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

For married individuals who died in 2011 and who die this year, their unused federal estate tax exemption is portable to the surviving spouse if IRS Form 706 is filed within nine months of the decedent's death. Previously, planners have been advised that the IRS had taken the position that portability of the estate tax exemption to the surviving spouse would be lost if the 706 return was filed late. However, that appears not to be the case.

The IRS National Office has indicated that it will accept late Form 706 returns and allow portability of the decedent's unused estate tax exemption to the surviving spouse that are marked "Return Filed Only for Portability - Good Cause Exception under Treasury Reg. 20.6081-1c.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.