Congress Promotes Perpetual Trusts: Why?

This posting updates the article titled Congress Promotes Perpetual Trusts: Why?. The article was originally posted on SSRN in September 2013. The updated version incorporates a discussion of two new developments—the unveiling of the long-awaited House Ways and Means Committee’s proposal for comprehensive tax reform and the issuance of the president’s proposed budget for 2015. Both of these new developments are disappointing because neither proposes curtailing or effectively curtailing perpetual trusts. By unwittingly granting a tax exemption for perpetual trusts, Congress undermined state perpetuity law and promoted private trusts that can last and remain tax exempt for many centuries and maybe forever. As a direct result of Congress’s action, and then of lobbying by financial institutions and other interest groups to convince state legislatures to remove the obstacle of perpetuity law, the very wealthy can now create tax-exempt private trusts for generations upon generations of their descendants. And they are massively taking advantage of the opportunity. Congress as an institution has known of its blunder for years, but has failed to remedy its mistake. On February 26, 2014, the House Ways and Means Committee unveiled its longawaited proposal for comprehensive tax reform, but the proposal does not address the tax exemption for perpetual trusts. The prospect for enactment of comprehensive tax reform in this Congress—the 113th—appears bleak in any event. The author asks why Congress has not acted to correct its mistake and why it seems so uninterested in doing so. There is no federal interest in promoting perpetually tax-exempt trusts and, in fact, the federal interest cuts the other way. Tax revenues are lost by Congress’s action and subsequent inaction. A plausible explanation for Congress’s persistent indifference to the problem is that the revenue gain by correcting the oversight would be a long way off. Congress is not known for giving a high priority to problems of that sort. The longer Congress procrastinates, however, the amount of wealth that is safely sheltered in perpetually tax-exempt trusts—already estimated to be in the billions of dollars—continues to grow. The Treasury Department has a proposal before Congress for remedying the situation, but the Treasury’s proposal, reiterated in the president’s proposed budget for 2015 issued on March 4, 2014, but ignored by the Ways and Means Committee’s comprehensive tax-reform proposal, is not nearly as effective as it could and should be. The author proposes a remedy that would be entirely effective and would be consistent with the original purpose of the tax law. Regrettably, the prospect that Congress will ever address the problem, much less address it effectively, grows dimmer with each passing year

Class Gifts under the Restatement (Third) of Property

The new Restatement (Third) of Property (officially the Restatement (Third) of Property: Wills and Other Donative Transfers), in tandem with the Restatement (Third) of Trusts, is systematically proceeding through the whole field of wills, will substitutes, trusts, and estates. Both of the new Restatements should prove to be handy resources for trust and estate lawyers, not only in preparing to argue cases at both trial and appellate levels, but also in the everyday work of drafting and construing dispositive provisions in wills, trusts, and other types of donative documents. Each Restatement section is followed by a set of Comments explaining and illustrating the black letter and by Reporter\u27s Notes collecting relevant cases, statutes, and secondary sources. The division of coverage between the Restatement of Property and the Restatement of Trusts is governed more by the history of the American Law Institute (the ALI or Institute) than by logic. The Trusts Restatement is primarily concerned with the validity and administration of trusts, including fiduciary duties of trustees. The Property Restatement is primarily concerned with the validity of gifts, wills, and will substitutes, but also with the construction of the dispositive provisions in trusts as well as those in wills and will substitutes. Consequently, in construing the meaning of a dispositive provision in a trust, the relevant Restatement is the Restatement of Property, not the Restatement of Trusts. The first two volumes of the Restatement (Third) of Property have now been approved by the ALI and published in hard-bound volumes. Volume 1, published in 1999, covers intestacy, execution and revocation of wills, and post-execution events affecting the meaning of wills, such as ademption, lapse, and antilapse statutes. Volume 2, published in 2003, covers gifts, will substitutes, capacity, undue influence, the elective share of the surviving spouse,\u27 construction,2 reformation,3 and modification of wills4 and other donative documents.5 Volume 3, which is scheduled to be published in 2007, will cover class gifts and powers of appointment. Although the material on class gifts, the subject of this brief survey, is not yet published in a hard-bound volume, it is published in soft-cover as Tentative Draft No. 4 (2004), and has been approved in principle by the ALI at the 2004 annual meeting. The class-gift material is available from the AL 6 and is also accessible online from Westlaw and Lexis. A parallel project is currently working its way through the processes of the Uniform Law Commission (ULC) for amending the Uniform Probate Code (UPC). That project is not as comprehensive as the class gift material in the new Restatement, but does overlap the rules of construction on questions of status of adopted children, nonmarital children, and children of assisted reproduction.7 The drafting committee has now approved measures that are largely consistent with the Restatement. Following ULC procedures, the current draft will be given a first reading at the 2007 annual meeting and, after further review and refinement, a final reading and approval at the 2008 annual meeting. To the extent that the UPC amendments, as finally approved, turn out to be in accord with the Restatement, the two will reinforce each other and strengthen the credibility of both

The Creeping Federalization of Wealth-Transfer Law

This Article surveys areas of federalization of wealth-transfer law. Federal authorities have little experience in making law that governs wealth transfers, because that function is traditionally within the province of state law. Although state wealth-transfer law has undergone significant modernization over the last few decades, all three branches of the federal government-legislative, judicial, and executive have increasingly gone their own way. Lack of experience and, in many cases, lack of knowledge on the part of federal authorities have not dissuaded them from undermining well- considered state law. The Article covers these topics: federal preemption of several areas of state law, the development of federal common law as a sometime substitute for preempted state law, the federal tax exemption for perpetual trusts, and the right of posthumously conceived children of assisted reproduction to Social Security survivor benefits

The Uniform Statutory Rule Against Perpetuities

When the National Conference of Commissioners on Uniform State Laws recently approved the Uniform Statutory Rule Against Perpetuities, it may at long last have made perpetuity reform achievable in this country. Coming, as it does, on the heels of the 1981 promulgation of the Restatement (Second) of Property (Donative Transfers), which adopts the same general type of perpetuity reform, and having been unanimously endorsed by the House of Delegates of the American Bar Association, the Board of Regents of the American College of Probate Counsel, and the Board of Governors of the American College of Real Estate Lawyers, the Uniform Act deserves serious consideration for adoption by the various state legislatures

The Uniform Probate Code Extends Antilapse-Type Protection to Poorly Drafted Trusts

The Uniform Law Commission\u27 promulgated a revised version of Article II of the Uniform Probate Code (UPC or Code) in 1990, and approved a set of technical amendments in 1993. As Director of Research and Chief Reporter for the Joint Editorial Board for the Uniform Probate Code (Board)2 and reporter for the UPC Article II drafting committee, I was privileged to serve as the principal drafter of these provisions. UPC Article II deals with the substantive rules governing donative transfers - intestacy; spouse\u27s elective share; execution, revocation, and revival of wills; rules of construction for wills and other donative transfers; and perpetuities. In all, UPC Article II contains eighty-five provisions, many of them brand new. The initial project took about four years to complete

What\u27s in the Third and Final Volume of the New Restatement of Property that Estate Planners Should Know About

Professor John Langbein and I have just concluded a twenty-year project for the American Law Institute to restate the law of donative transfers. The official title of our three-volume Restatement is the Restatement (Third) of Property: Wills and Other Donative Transfers.1 We refer to it herein simply as the Property Restatement. The third and final volume of the work was published in the last days of 2011. Professor Langbein spoke about certain of the initiatives in the two earlier volumes, which set forth the principles governing the law of wills, intestacy, interpretation of instruments, and the nonprobate system. The concluding volume covers class gifts, powers of appointment, future interests, and perpetuities. In our division of labor today, I will be speaking about that material. Because I will not be able to cover all of the topics in the third volume, I have added an Appendix to the print version that reproduces the Table of Contents for that volume. Although the Property Restatement does not address the tax-planning side of the work of estate planners, it does address the state-law side of the practice: the everyday work of drafting and construing dispositive provisions in wills, trusts, and other types of donative documents, as well as preparing to argue cases at both trial and appellate levels. When it comes to litigation, the courts pay attention to the Restatement and usually follow it.2 The Property Restatement, not the Trusts Restatement, deals with the interpretative matters applicable to dispositive provisions in trusts as well as in wills and will substitutes. Consequently, in construing the meaning of a dispositive provision in a trust, the relevant Restatement is the Restatement of Property, not the Restatement of Trusts

Marital Property Rights in Transition

The subject of marital property rights is very timely because those rights are in a state of transition. The term marital property rights covers a vast multitude of rights or interests conferred by law on persons who occupy the status of spouse. This lecture is divided into four discrete, yet related segments. The first segment addresses how the law allocates original ownership between spouses in a marriage. The second segment turns to the intestate share of the surviving spouse. This is not a topic that high-powered estate planners get involved in very much because intestate estates are usually fairly small. But to the surviving spouse, the intestate share can mark the difference between economic security and poverty. The third segment addresses the rights of spouses upon divorce and disinheritance at death. The fourth and final segment surveys some recent developments regarding the rights of persons who are not spouses at all, but near-spouses