Rule Against Perpetuities
Ashley Vaughan (J.D. Candidate, May 2006, South Texas College of Law, Langdell Scholar for Federal Income Taxation and the Managing Editor of the Corporate Counsel Review, a journal published by the Corporate Counsel Section of the State Bar of Texas) has recently published her comment entitled You Can’t Take it With You: Property Rights After Death and Rethinking the Rule Against Perpetuities, 47 S. Tex. L. Rev. 615 (2006).
Here is the conclusion of her article:
If the true motivation for perpetuities reform is to avoid the consequences of the estate tax, it begs the question: Why not go directly to the source and repeal the estate tax? One obvious reason for the indirect approach is that perpetuities reform is a route states can pursue on their own, while repealing a tax imposed by the federal government would take an act of Congress. While therein may lie the answer, at least in part, the better question might be to consider why repeal of the federal estate tax is unlikely. Taking it one step further perhaps would initiate a discussion of why Congress, if it is going to continue to impose the estate tax, allows individual states to create means of circumventing it. In any event, the 2001 Act spawned a complicated scheme and a struggle among the states and the federal government. The lack of uniformity among the states in the movement toward perpetuities reform created a muddled and uneven playing field. It seems that the plot will only thicken, and to create a workable solution, Congress may have to pick sides.
Despite its pros and cons, the Rule’s longevity has finally reached its limits. The likely return of the estate tax in 2011 will prompt even more states to take reform into consideration. As more and more states have repealed the Rule or abolished it, the benefit of any one state’s retention of the Rule has become virtually nonexistent. Any settlor interested in creating a perpetual trust will simply take its business elsewhere, depriving the state’s economy of housing the wealth of its citizens. Texas, like the other states considering reform and even those a bit slower on the uptake, should take action both to create a more level playing field and to provide its citizens with more options and freedoms.
Despite the uncertain future of the estate tax and the previously unsuccessful attempts to modify or appeal the Rule, the state must continue its march toward reform to remain competitive in the face of these changing laws. Perhaps the amendments would be more successful if, like statutes from other states, Texas shifted the perpetuities inquiry from remoteness of vesting to limiting restrictions on alienability. While, as explained above, any well-drafted trust instrument can easily answer this concern, a statutory prohibition that directly addresses the issue might put more naysayers at ease. As long as the property remains alienable, then trustees and beneficiaries will be afforded the freedom to decide whether the trust’s benefits continue to outweigh its administrative costs. Finally, perpetual trusts are less an issue of intergenerational inequity and more a reality of intergenerational cooperation to minimize taxes and preserve family prosperity.
The classic arguments for and against the Rule have turned largely into a struggle between antiquated fears and a push towards greater personal freedom to determine the disposition of one’s property. With the duration of the estate tax long after its intended purpose and the later imposition of the GST, the perpetuities reform movement is evidence of the public’s desire to “push back” and retain more of the fruit of its labors. Superficially it might be viewed as a battle between the common public and the extraordinarily wealthy, but realistically, abolition of the Rule has costs and benefits to each member of society. While the Rule is not without its benefits, nor reform without its costs, these factors are largely outweighed by the greater freedoms and tax benefits of reform and the increased economic opportunities for the state.