The Constitutionality of Perpetual Trusts

While most Americans struggle to plan for their financial futures beyond the next decade, others with money and forethought are likely to think far in advance about the legacies they hope to leave for future generations. 

This has led states to compete for the business of perpetual trusts, which are designed to last forever.  As a result, people have put their millions into them, avoiding traditional trusts, which generally have a lifespan of one-hundred years.  Trust creators are allowed to maintain some control beyond their lifetime, helping protect fortunes from taxes and creditors.

Yet, Harvard Law School professor, Robert H. Sitkoff, argues that perpetual trusts are unconstitutional in some of the states that have tried to persuade people to establish them.  People who created perpetual trusts in states where they are legal could find themselves in trouble, as lawsuits brought in a state where the trusts are prohibited could result in those out-of-state assets being counted in any settlement. 

In the paper, “Unconstitutional Perpetual Trusts,” which will appear in the coming issue of The Vanderbilt Law Review, Mr. Sitkoff argues that legal challenges to these trusts could come from two sources: creditors in a state where the trusts are unconstitutional who are seeking ways to maximize their settlements, and descendants who want to break the trust and get their money now and without strings attached.

However, not everyone agrees with Mr. Sitkoff’s opinion.  Senior managing director and trust counsel at the Wilmington Trust Company, Richard Nenno, says clients who live in Texas, where these trusts are unconstitutional, could get around problems by moving as many assets as possible to Delaware, where perpetual trusts are legal, and appointing trustees in Delaware to oversee the trust.  “You want to minimize your ties with Texas.  If you do that and questions come up, the Delaware courts are going to be the courts that say the trust rules apply and the trust is perfectly valid.”

See Paul Sullivan, The Ins and Outs of Trusts That Last Forever, The New York Times, Dec. 5, 2014. 

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.