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.
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