Article on the Proper Interpretation of State Constitution Perpetuities Provisions

Les Raatz recently published an Article entitled, State Constitution Perpetuities Provisions: Derivation, Meaning, and Application, 48 Ariz. St. L.J. 803 (2016). Provided below is an abstract of the Article:

The Rule Against Perpetuities, over the last decade or so, has attracted greater attention within areas of the estate planning bar. There are interrelated factors that are the primary reasons for this attention. One is the marketing of trusts that are designed to better protect against the ability of creditors of the beneficiaries of a trust to reach assets of the trust to satisfy their claims. Lengthening the period that such assets may remain unvested in beneficiaries in the trusts is touted as enhancing their value and usefulness. The longer period to defer vesting also has beneficial estate tax consequences. If trust property can be held for generations in a trust not subject to the common-law rule requiring the vesting of interests of the trust in the beneficiaries of the trust within a period ending twenty-one years after the death of the last to survive of those living when the trust became irrevocable, then inclusion of trust assets in the gross estates of beneficiaries for federal estate tax purposes is avoided to a greater extent.

Another less considered estate and income tax consequence is the ability to cause inclusion of trust property in the gross estate of a decedent by means of the decedent springing the Delaware Tax Trap (“DTT”) in order to cause the basis of the property to be “stepped up” to its fair market value at the date of the decedent’s death when no estate tax would arise. The DTT occurs when a person holding a power of appointment over property in trust appoints the property in further trust effective upon the person’s death and grants another a power to thereafter appoint the property, which second power may be exercised to postpone vesting over a perpetuities period determined from a different date than the date of the perpetuities period applicable to the first power. The intentional triggering of the DTT is a new planning device that arose from the substantial increase in the federal estate tax exemption. If the beginning date applicable to the perpetuities period in which the property must vest pursuant to exercise of the second power would otherwise violate the common-law rule, then state legislation must permit the variance.

However, legislation alone might not assure the abrogation of the common-law Rule Against Perpetuities. Some states’ constitutions contain clauses that at least raise the issue of whether such legislation may be prohibited. This Article discusses the proper interpretation of many of those constitutional provisions. The proper interpretation is dependent upon examination of the history of the early development of the constitutional provisions. This author concludes that the meaning of the states’ constitutional prohibitions against perpetuities was not to address remoteness in vesting, but to address the historic meaning of “perpetuities,” that of restraints against alienation of title.