Perpetual Trust May Help Manage a Dynasty’s Fortunes Across Generations

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In our business, we’re accustomed to suggesting trust solutions for clients that have built-in requirements about how assets must be distributed, and when distributed, often stating a distribution a deadline. In other words, most trusts eventually expire, by which time their holdings have been drawn down to zero. But sometimes, complex family situations dictate that a trust be created that doesn’t have a “sell-by”, that is, termination date, and theoretically lasting forever!

This is called a “dynasty” trust, or “perpetual” trust. These are fairly unusual, and because of their complexity they take a good bit of doing to set up. But in some circumstances, they can provide a strong wall of protection for a multi-generational family’s assets.  And this type of trust can be a vehicle that may assist in the passing on family values to future generations.

There are a couple of ways a dynasty trust can be structured to benefit more than one generation. It might, for example, be written so a parent, children, and grandchildren can all draw from it at once. Alternatively, a trust can deal with just one generation at a time. Say the surviving spouse of the trust’s creator draws distributions during their lifetime; only after the spouse’s death would the children be able to start drawing from it; and so on down the line.

That’s possible because the trust never expires. It used to be that North Carolina law wouldn’t permit a trust to last more than 90 years, or 21 years after the last beneficiary’s death. But legislation in 2007 overturned that restriction, legalizing perpetual trusts. By the way, there’s still some controversy about just how legal they are; we’ll get to that a bit later. As of now, perpetual trusts are permitted in North Carolina as long as the trustee has the power to sell trust property.

Another chief quality of a perpetual trust is that it doesn’t require distributions on any particular schedule. Conventional trusts typically require a beneficiary to draw a certain amount every year or take full possession before a certain date. That doesn’t apply to a perpetual trust, which can have some surprising advantages.

Imagine that the beneficiary of a trust loses a lawsuit or otherwise owes a lot of money. While many of that person’s assets might be subject to collection or seizure, what’s in a trust is protected. But a conventional trust that requires distributions would move that money into the beneficiary’s bank account, where it would be fair game for creditors to grab. With a perpetual trust, that person could simply decline to draw on its assets, keeping them where they’ll be safely shielded from courts and collection agencies.

Protection of family values may be another objective of a dynasty trust and sometimes as important as passing on family wealth for the trust creator. This is a tool that can be used by the trust grantor in hopes of passing on their life philosophy and work ethic to the trust beneficiaries. For example, a perpetual trust may contain various incentives to induce the beneficiaries to remain productive members of society and a disincentive to rely solely on the wealth generated by a trust fund.  A trust that will eventually terminate cannot fully provide protection against beneficiary excess, since the trust property will eventually be distributed outright to them.

Until fairly recently, a trust could guarantee that a surviving spouse’s share of an estate would be exempt from the estate tax. However, federal law now provides that protection. New tax legislation has also raised the estate and gift tax exemption from $1 million in 2002 to $11.4 million in 2019. That means estate taxes aren’t an issue for most people. But just in case a future Congress lowers the estate-tax exemption again, a perpetual trust could lock in the current level.

Another scenario: a surviving spouse remarries and wants to disinherit the deceased ex’s children. A perpetual trust would make that impossible. There’s another side to that coin, though. A trust could guarantee that the same surviving spouse wouldn’t lose the inheritance-tax exemption upon remarrying.

Then there’s the matter of young heirs who might find it too tempting to get a big lump-sum distribution when they turn 18, 25, or some other specified age. That’s a common feature of many trusts and has the danger that the inheritance might be squandered in short order. A perpetual trust gives its trustee, not the beneficiary, the power to make distributions, or not. Another way to look at it: that young (and perhaps irresponsible) heir owns the assets but can’t necessarily get to them without the trustee’s OK.

All that being said, a perpetual trust isn’t for everyone. It takes a good bit of planning and legal work to set up. That process requires careful discussion of who the trustees will be – who the owner will rely on to carry out their wishes – and about how the assets will be used, potentially into the very distant future. Keep in mind that while this sort of trust can be very specific (some have called it “a hand controlling from the grave”) it doesn’t have to be. It can just as readily grant a lot of flexibility to the trustee.

That brings us back to the question of legality. Even though North Carolina law explicitly permits perpetual trusts, the state Constitution includes a provision that says, “Perpetuities and monopolies . . . shall not be allowed.” That raises the important question of whether the current state law is constitutional! Some experts caution that a perpetual trust might be challenged on that basis, maybe by disgruntled relatives who want more access to an inheritance than a trust grants them, or maybe by creditors.

We don’t want to get into all the legal questions and complexities here, other than to say this question is controversial among experts, and that the state’s courts haven’t clarified things since the 2007 legislation took effect. On balance, we think it’s a safe approach, but as noted before, not for everybody.

So, if you think a perpetual or dynasty trust might be useful for your family’s situation, your wisest course is to consult with experts on trusts and on inheritance law. The financial-planning experts at Old North State Trust are knowledgeable about this kind of trust, can give you good advice on how it works, and work with your attorney to help you set one up if it’s the best way to accomplish your specific wishes.

Of course, if another estate-planning approach is a better fit, we’ll advise you about the most beneficial alternatives, too.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends.  The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics.  Readers should be aware that the facts may vary depending upon individual circumstances.  The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.