Does the rule against Perpetuities have a future?

A renowned expert on trusts and estates, Professor Robert Sitkoff joined the HLS faculty this fall from New York University School of Law. He says we are in the midst of a “quiet revolution in modern American trust law.” Here, he explains.

I am referring to a series of reforms over the last 20 years that, taken together, represent a major updating of the trust canon.

Nearly half the states have repealed or modified the Rule Against Perpetuities to allow for perpetual trusts. And, 10 states have validated the so-called self-settled asset protection trust—or APT—which is a trust for the benefit of the settlor but against which the settlor’s creditors have no recourse.

Explaining how these reforms came about is straightforward. They are products of the jurisdictional competition for trust funds. Trust lawyers and bankers press state lawmakers to adopt these reforms in the hope of attracting trust business from out of state.

Whether these reforms represent good policy is a tougher question. APTs, in particular, are controversial because they have the potential to destabilize tort and other financial deterrent-based regulatory systems.

Real money is at stake. Banks and other institutional trustees hold more than $1 trillion in noncommercial trust funds, and the fiduciary and attorneys’ fees associated with these trusts measure in the billions of dollars. In a study published in 2005 in The Yale Law Journal, my co-author and I showed that roughly $100 billion in trust assets has poured into the states that permit perpetual trusts.

A separate jurisdictional competition concerns business trusts. Eight states have resurrected the common law business trust as a viable mode of business organization by enacting statutes that transmogrify it into the statutory business trust. Similar legislation is pending in other states, and a uniform act—for which I am the reporter—will be promulgated soon.

Real money is at stake here, too. I estimate the volume of commercial activity organized in modern business trusts—which includes three out of every four mutual funds—to be in excess of $10 trillion.

Another engine for change is the law reform apparatus of the Uniform Law Commission and the American Law Institute, both of which have heavy academic participation. Thanks in large part to the 1992 Restatement (Third) of Trusts and the 1994 Uniform Prudent Investor Act, all the states have updated their prudent trust investment laws to account for the teachings of modern portfolio theory. In a study forthcoming in the Journal of Law and Economics, my co-author and I show that this reform prompted a significant shift in trust investment away from government bonds and toward corporate securities, hence a shift to higher risk/reward portfolios.

More recently, the Uniform Law Commission promulgated a Uniform Trust Code in 2000. Although it mainly codifies traditional law, it also includes some interesting reforms. Some, such as a liberalization of trust modification and termination rules, are designed to offset the anticipated problems of the growing use of perpetual trusts. What remains to be seen is how the code, which has been enacted in 20 states, will intersect with the jurisdictional competition for trust funds. The code is silent on perpetual trusts and rejects APTs, and one state even repealed the code after an anti-code lobbying effort by local lawyers.