History Changed. Would you believe that 500 years after the death of Queen Elizabeth Michigan has taken its first steps to eliminate a medieval carryover into our laws of trusts and estates? This old relic is called the Rule Against Perpetuities (RAP).
What is the RAP? The Rule Against Perpetuities - RAP - was established in medieval England to prevent property from being tied up in trusts forever. Since land was the principal form of wealth in medieval days, the ruling monarchs and parliament decided that it was against public policy to prevent alienation of real estate indefinitely. By alienation we mean sale or other transfer of ownership. In other words, there was concern that estates, land primarily, would be held in a trust forever which could be uneconomical or unproductive and thereby contrary to the welfare of society and the country. These medieval rules were carried over into American common and statutory laws. From your history books you might recall that the laws of most states originated with the common law and statutes that existed in England when most of the early settlors came to North America. When the laws regarding property were codified in statute, most states adopted some version of the English RAP. The RAP regulates the length of time that a trust can be in existence. In Michigan, it was generally limited to a maximum of 90 years, or the longest life of a beneficiary living at the time of the Trust, plus 21 years.
Many States Have Repealed RAP For Competitive Reasons. Starting with such states as Alaska, South Dakota and Delaware, states have begun repealing RAP as the rationale for limiting the life of a trust has become less tied to land and more involved with securities and business interests of various types. Moreover, since trusts typically buy and sell property, real estate as well as securities, state legislatures have decided that there is no strong public policy to restrict the period of time, or number of generations, that a trust can be existence.
Some states have inserted a ridiculously long period of time such as 1,000 years. Others have eliminated RAP completely. In Michigan, the legislature in 2008 has split the baby in Public Acts 148 and 149.
Michigan’s Solution. Effective May 28, 2008, the RAP was abolished with respect to personal property held in trust. This would include all financial instruments, corporate shares, bonds, etc. It is now possible in Michigan to have a trust holding personal property exist in perpetuity.
What About Real Estate? For some reason, the legislature did not make a sweeping abolition of RAP. The elimination expressly applies only to personal property. This is a strange distinction in our modern era because real estate can be held by a corporation or an LLC, the shares or membership interests of which are classified as personal property. Therefore, it is easy to hold real estate in perpetuity by transferring title to a separate entity such as a corporation or LLC.
What Difference Does This Make to Most Clients? Some clients, wealthy or not so wealthy, want to establish trusts for future generations which will not be subject to estate or inheritance taxes. These are sometimes called "dynasty" trusts. Generally, these trusts are identified with the super wealthy families such as Ford, Kennedy, Rockefeller, etc.
Now with many states removing the barrier to perpetual trusts, Michigan trustees and residents found themselves at a disadvantage when contrasted with other states where perpetual trusts can be established. Now that disadvantage has disappeared for trusts that were revocable on May 28, 2008, or are created after that date. However, perpetual trusts are a favorite topic of writers in the financial press. Michigan trusts are no longer disadvantaged for those residents who want to explore this option.
We find relatively little interest in perpetual trusts among our clients. This may be because of the typical Midwestern conservative values and the desire not to control family wealth from the grave forever. Conclusion. Whether you have any interest in a dynasty trust or want to explore the possibility, or desire any help with your estate planning needs, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660
Brandt, Fisher, Alward & Pezzetti, P.C.
This newsletter is for informational purposes only and is not intended as legal advice.
