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Will Clauses Addressing Long-term Trusts Created Under Wills – Rule Against Perpetuities and the Delaware Tax Trap Concerns (2 Pages)

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CLAUSE 1: Rule Against Perpetuities Savings Clause
CLAUSE 2: Broader (more flexible) Rule Against Perpetuities Savings Clause
CLAUSE 3: Avoid Springing the Delaware Tax Trap

In some cases, a testator may create a trust under a Will that may have a long duration. Perhaps the testator intends to create a perpetual trust, such as a Dynasty Trust, or at least a long-term trust to benefit several generations of family members. In a number of states, the rule against perpetuities has been abolished, so that there is no limit on the duration of a trust. Other states have extended the possible duration of a trust for hundreds of years, or even up to a thousand years, so that special planning for the rule against perpetuities is not necessary. However, many states still retain the rule against perpetuities, which states that an interest in a trust is void if the interest does not vest in a beneficiary within lives in being at the creation of the trust, plus twenty-one years. Accordingly, where the rule is still recognized, it is necessary to include overriding language in a Will to “save” the long-term trust and make certain that no trust created under the Will will fail to vest within the required perpetuities period. Such a provision is addressed in (Clause 1).

A situation may exist where there has been a change in the law of the jurisdiction where the trust was originally created that may allow the trust to continue for a longer term if, for example, the rule against perpetuities is extended or repealed in that jurisdiction. Or, the trustees may move the trust to a different state that has a more favorable interpretation of the rule against perpetuities than the state in which the trust was originally created. In either case, a more “flexible” perpetuities saving clause may be advantageous. Such a provision is addressed in (Clause 2).

When a long-term trust is created, another concern may arise that is associated with the rule against perpetuities issue. This is sometimes referred to as the “Delaware Tax Trap” over an issue that arose under an old Delaware statute. While it may be desirable to give future beneficiaries of a long-term trust a limited power of appointment to control the disposition of the trust property, Code Section 2041(a)(3) provides that if the donee of a power of appointment exercises that power to create another limited power of appointment to postpone the vesting of an estate or interest in property or suspend the absolute ownership or power of alienation of such property, without regard to the date of creation of the first power, the property subject to the power will be included in the estate of the power holder. Consequently, to avoid this result, and avoid “springing” the Delaware Tax Trap where a trust created under a Will includes the opportunity to exercise a limited power of appointment, language such as provided in (Clause 3), should be included in the Will.

Author:
Steven G. Siegel is president of The Siegel Group, a Morristown, New Jersey - based national consulting firm specializing in tax consulting, estate planning and advising family business owners and entrepreneurs. Mr. Siegel holds a BS from Georgetown University, a JD from Harvard Law School and an LLM in Taxation from New York University.
He is the author of several books, including: Planning for An Aging Population; Business Entities: Start to Finish; Taxation of Divorce and Separation; Income Taxation of Estates and Trusts, Preparing the Audit-Proof Federal Estate Tax Return, Putting It Together: Planning Estates for $5 million and Less, Family Business Succession Planning, Business Acquisitions: Representing Buyers and Sellers in the Sale of a Business; Dynasty Trusts; Planning with Intentionally-Defective Grantor Trusts; The Federal Gift Tax: A Comprehensive Analysis; Charitable Remainder Trusts, Grantor Trust Planning: QPRTs, GRATs and SCINs, The Estate Planning Course, The Retirement Planning Course, Retirement Distributions: Estate and Tax Planning Strategies; The Estate Administration Course, Tax Strategies for Closely-Held Businesses, and Tort Litigation Settlements: Tax and Financial Issues.
Mr. Siegel has lectured extensively throughout the United States on tax, business and estate planning topics on behalf of numerous organizations, including National Law Foundation, AICPA, CCH, National Tax Institute, National Society of Accountants, and many others.  He has served as an adjunct professor of law at Seton Hall and Rutgers University law schools.
The Siegel Group provides consulting services to accountants, attorneys, financial planners and life insurance professionals to assist them with the tax, estate and business planning and compliance issues confronting their clients. Based in Morristown, New Jersey, the Group has provided services throughout the United States. The Siegel Group does not sell any products. It is an entirely fee-based organization.
Contact the Siegel Group through its president, Steven G. Siegel, e-mail: steve@siegel.net.

 

 

 

 

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