In the late 1980s, large financial institutions successfully marketed a new exemption in the tax code authorizing the perpetual insulation of wealth from federal transfer taxes. Specifically, the 1986 tax code reforms included an exemption from the federal Generation Skipping Transfer Tax, 26 U.S.C. § 2631, that permitted wealth to be transferred, tax-free, to future generations of the donor without subjecting such transfers to the Gift Tax, Estate Tax, or the Generation Skipping Transfer Tax at each generation. In 2014, the exemption amount will be $5.34 million for each individual; the exemption amount is doubled for married couples.
While perpetual transfers could be made tax-free under 26 U.S.C. § 2631, they were subject to temporal limits imposed by state law, namely, the Rule Against Perpetuities. However, financial institutions successfully overcame that impediment by lobbying state legislatures to repeal or abrogate the Rule Against Perpetuities. This enabled wealthy donors to establish perpetual trusts that took full advantage of the GST Tax exemption. It also spawned a new lucrative business for the corporate fiduciaries that created and managed perpetual trusts.
Now that most jurisdictions have repealed or abrogated the Rule Against Perpetuities, estate planning practitioners have started to consider whether a trust created to comply with the Rule could, after the Rule’s repeal, be extended in perpetuity to provide for future generations of the settlor’s descendants. In my forthcoming article, Trust Term Extension, I examine the issue of whether trust law doctrines would permit this type of modification. In particular, the article focuses on the trust law doctrines of equitable deviation and modification to achieve the settlor’s tax objectives.
The article concludes that modification of an existing trust to provide for new beneficiaries not explicitly selected by the settlor would constitute a misapplication of trust law doctrine and would be inconsistent with the modern trend in trust law favoring the rights of living beneficiaries over dead hand control. Financial institutions receiving compensation for serving as a corporate trustee would stand to benefit from this type of modification, but at the high cost of impairing the interests of existing beneficiaries selected by the settlor.