Federal Tax Rules Should Not Be Used To Limit Trust Duration

Professor Lawrence Waggoner's recent article titled ''Effectively Curbing the GST Exemption for Perpetual Trusts'' raises practical and policy problems with the existence of perpetual trusts and indicates that the enactment of the generation skipping transfer tax (GSTT) is responsible for encouraging several states to repeal their limits on perpetual trusts.1 We admire and respect Waggoner and acknowledge that the concerns he raises may be perfectly valid. We also agree that federal tax policy in the form of the GST exemption encouraged perpetual trusts and that the federal government can legitimately end that incentive.

However, we strongly disagree with Waggoner's solution because it is intended to, and would, impose a tax penalty on perpetual trusts rather than merely eliminate the existing tax incentive to create them. In our view, discouraging perpetual trusts is simply not an appropriate use of federal tax law, regardless of the arguments one can legitimately make about their evils. Moreover, as is discussed below, there are simple ways to eliminate the tax incentive to create perpetual trusts.

To date, a limit on the duration of trusts in the United States has been a rule of property law, governed by state statute or case law, and has varied from state to state. In our view, limits on trust duration, like other property law matters, should continue to be left to the states to address.2 State law has long permitted the creation of perpetual trusts for the benefit of charity, and as explained below, some states allowed perpetual trusts for individuals before the current GSTT was enacted. Since the enactment of the GSTT, many other states have decided that individuals should be able to create perpetual trusts for the benefit of individuals as well as charities. Waggoner and others, as well as some of us, think that allowing perpetual trusts for individuals is bad public policy, while others of us disagree with that position. There can be many different opinions about how long trusts should last.

Regardless of how we or our elected representatives to the U.S. Congress may feel about whether the decision of various states to allow perpetual trusts is good public policy, the duration of trusts clearly is not a federal tax issue. Waggoner's proposal does far more than limit the tax benefits given to perpetual trusts, and as such, it would represent an unjustified federal intrusion into an area that is traditionally governed by state law.

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