The Unknown Dynasty Trust Option and The Indirect Rules Against Accumulations.

This article was written by Thomas Oriet, Esq, LLM, EA, an Of-Counsel attorney who focuses on asset protection, estate planning, and agricultural law at the Law Offices of Casey D. Conklin.

South Dakota has a strong reputation for estate planning and asset protection, sometimes called the “South Dakota Advantage.” Clients can establish a dynasty trust and incur no state taxes associated when property accumulates wealth over long periods of time: capital gains tax, estate tax, or income tax. Michiganders have local options available to improve their asset protection, such as an attorney drafting a Domestic Asset Protection Trust and a qualified affidavit. Michiganders could consider placing property into a generic or special type of trust to safeguard assets against creditors, to avoid probate court overseeing their assets, or to use up their generation-skipping tax exemption. A grantor dynasty trust containing property equal to or less than the amount of the generation-skipping tax exemption ($11,700,000 in 2021) means placing the exemption amount in trust assets will likely not be subject to estate tax, gift tax, or generation-skipping tax at each subsequent generation. Of course, many other factors can impact the outcome, which is why discussions with a professional is necessary: e.g., when the client creates the trusts or when the trust becomes effective, family longevity, changes to the law, etc.

In this article, I will cover two major rules that limit the available trust options, which are overlooked or misconstrued given their complexity: the rule against perpetuities and the rule against accumulations.

Rule Against Perpetuities. For trust purposes, the Rule Against Perpetuities (“RAP”) prevents non-charitable trusts from lasting for a long time.[1] The person who earned the money or property and placed them into a trust is probably the most qualified individual to decide what should happen to that property. When that person dies, the trust document gives written directions to a trustee on how the deceased person wants the property managed for future familial generations, known as the “dead-hand,”[2]

The RAP applies when the deceased person’s directions control the property through the trust document, and no trust beneficiary can determine when the trustee will pass full-ownership to those beneficiaries. The beneficiary only holds an equitable interest in the trust property, and sustaining that equitable interest for an indefinite period, as the dead-hand intended, can make the property unmarketable or subject to higher transaction costs.[3] If the original owner intends to obstruct the beneficiaries from selling the trust property, the RAP effectively restrains a property owner’s control inhibiting marketability after death.[4] Surprisingly, America adopted the RAP from Great Britain – a country ruled by a monarchy with dynastic wealth – and many U.S. states have repealed or prolonged the perpetuities period since the adoption.

The duration of dynasty trusts in Michigan and South Dakota can differ based on the kind of property placed into the trust. South Dakota abolished its rule against perpetuities;[5] meanwhile, Michigan allows for dynastic trusts with many rules to examine.[6] Generally, a Michigan trust created after 2008 can hold anything except real estate or buildings and can survive a perpetual duration.[7] However, the Michigan Dynasty is not absolute although the trust contains only personal property. The exception applies to nongeneral (special) powers of appointment, which is a right to designate or postpone a selected group of individuals to receive the personal property held in trust or to create another special power of appointment.[8] If someone, who is not the trustee, has a special power of appointment –– and that person creates another special power of appointment that is controlled by another non-trustee, this second special power of appointment may delay trust property from vesting in a beneficiary for 360 years.[9]

Real property held in Michigan trusts is subject to the RAP;[10] thus, when the trust with real property is created, the trust beneficiary must take possession and legal title of the property no later than 21 years after the trust is created. Even if a trust violates the rule against perpetuities due to a difficult or unforeseen circumstance, the later-in-time transfer is not presumptively invalid under the RAP because a court could amend the disposition to approximate the trust-creator’s intent.[11]

Rule Against Accumulations (The more interesting, forgettable rule). A dynasty trust serves no purpose if someone cannot accumulate wealth or merely preserve the trust assets against inflation or depreciation. The rule against accumulations stems from Peter Thellusson, a wealthy English banker, who left the residue of his estate in trust to accumulate income during the life of his living heirs at Peter’s death.[12] Whatever remained in the trust after Peter’s living heirs died would be distributed to Peter’s more remote heirs.[13] Since the gift would vest within 21 years after all the living heirs died, the trust did not violate the RAP and accumulating income during the perpetuities period was valid too.[14] Notice, there was no common law rule against accumulating wealth, but if a condition that disposed of the accumulated wealth violated the RAP, then the method of accumulating wealth was unlawful.[15]

Although Peter’s will left his spouse and children received a decent inheritance, the British public and American lawyers were in an uproar about people skipping immediate family members to benefit subsequent generations.[16] The world discovered that Peter’s trust could appreciate in value to 140,000,000 pounds,[17] which is worth around 18,000,000 pounds in 2020.[18] In reality, Peter’s trust terminated early due to improper trust management and litigation costs defending the testamentary trust or its attempt to accumulate wealth.[19]

If the immediate family’s litigation wasn’t enough, Peter’s sons were parliamentarians. The sons influenced the enactment of a statutory Rule Against Accumulations named after their father (and themselves): the Thellusson Act.[20] Michigan created a stricter accumulations period that only allowed real estate interests to accumulate for minor beneficiaries while they were not the legal age of majority.[21]

Some of the lessons from the Thellusson case and aftermath:

1. The rule against accumulations matches the rule against perpetuities, yet it focuses on generating income from the unvested capital rather than vesting title.

2. Even if the trust could accumulate millions of dollars with each generation, trustee selection is imperative for the trust’s survival.

3. Assets that skip generations have the potential to generate enormous wealth over time, which further explains the enactment of a U.S. generation-skipping transfer tax.

4. Will contests, trustee-beneficiary disputes, and other litigation can quickly dissipate a family’s wealth before the next generation can benefit from the trust. Living immediate family members may want a dynasty trust to fail because the beneficiaries are not family-oriented: “if I cannot receive the benefit of the principal or income, nobody should, including subsequent generations.”

5. The Thellusson case is a testament to creative legal thinking – “if title must vest within 21 years, why should wealth not accumulate within 21 years?” Litigators influenced future legislation and the creation of the rule.[22]

6. The public has always been repulsed at the idea of wealthy people or frugal people with substantial savings accumulating or preserving fortunes for future generations, even if the immediate family incurs no financial hardship for missing out on those trust assets.[23]

As expected, South Dakota has no rule against accumulations.[24] In Michigan, the rule against accumulations is repealed for personal property placed in a trust under the same statute applying to the rule against perpetuities,[25] and the accumulation of profits of real estate is repealed.[26] Michigan appears competitive with South Dakota since no rule against accumulation generally applies to limit generational wealth. However, Michigan income taxes must be considered. Michigan charges an income tax on trust income at the same rate as individuals.[27] The tax is not egregious (4.25% in 2020), but wealth has trouble accumulating when it’s hindered annually. The tax liability arises when income is earned in Michigan, or the trust is considered a Michigan resident.[28]

Conclusion. Michigan is well-above average with asset protection legislation that deserves more credit than its current reputation. As the law advances, Michiganders (and estate planners) will wait and see if “the Michigan Advantage” will come alive, raising Michigan to the very top-ranking jurisdictions in estate planning.

This article is a service of Casey D. Conklin. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Wealth Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office or visiting my online calendar to schedule a 20 minute consult, or here to schedule a Wealth Planning Session, mention this article to find out how to get this $750 session at no charge.

[** The information in this article is not legal advice and must only be used for educational purposes. Please consult with an attorney before making any decision. The author will not be update the article due to changes in the law.]

[1] Cleveland v. Second Nat'l Bank & Tr. Co., 354 Mich. 202, 211, 92 N.W.2d 449, 453 (1958) [2] Max M. Schanzenbach and Robert H. Sitkoff, "Perpetuities or Taxes? Explaining the Rise of Perpetual Trust," 27 Cardozo L. Rev. 2465, 2481 (2006). [3] Burt v. Commercial Bank & Tr. Co., 244 Ga. 253, 257, 260 S.E.2d 306, 309 (1979) ("The Rule against Perpetuities is a rule invalidating interests which vest too remotely. Indeed, it is often called the rule against remoteness of vesting. It is not a rule invalidating interests which last too long.") (quoting Leach, Perpetuities in a Nutshell, 51 Harv. L. Rev. 638, 639 (1938)); Thomas W. Merrill & Henry E. Smith, “Optimal Standardization in the Law of Property: The Numerus Clausus Principle,” 110 Yale L.J. 1, 8 (2000) ("The existence of unusual property rights increases the cost of processing information about all property rights. Those creating or transferring idiosyncratic property rights cannot always be expected to take these increases in measurement costs fully into account, making them a true externality. Standardization of property rights reduces these measurement costs."). [4] John Chipman Gray, The Rule Against Perpetuities § 156 (Little, Brown, & Company, 3d ed. 1915). [5] S.D. Codified Laws § 43-5-8. [6] MCL 554.94. [7] MCL 554.94; Black’s Law Dictionary, PERSONAL PROPERTY. [8] MCL 556.112. [9] MCL 554.75. Note that someone other than the trustee can hold a special power of appointment: e.g., trust director. The author is simplifying the rule, but an attorney should be consulted on the nuances of the exception. [10] MCL 554.72(1) (the present rule), 554.51 (rule against perpetuities exist), 554.53 (rule against perpetuities subject to Uniform Statutory Rule Against Perpetuities, MCL 554.72). [11] MCL 554.74. [12] Karen, Sneddon, Comment, “The Sleeper Has Awakened: The Rule Against Accumulations and Perpetual Trusts,” 76 Tul. L. Rev. 189, 199 (2001) (discussing Thellusson v Woodford (1799) 4 Ves 227) [13] Id. [14] Lewis M. Simes. “Public Policy and the Dead Hand: Five Lectures Delivered at the University of Michigan February 7, 8, 9, 14, and 15, 1955” in Thomas M Cooley Lectures Sixth Series (University of Michigan, 1955) at 85 (discussing Thellusson v Woodford (1799) 4 Ves 27. [15] Id. at 89 (discussing Thellusson v Woodford (1799) 4 Ves 227). [16] Id. at 83–88. [17] Id. at 83–88. [18] Bank of England, Inflation Calculator (2021), online: <> (Peter Thellusson died in 1797 and the future value of the trust management was 140,000,000 pounds; input the cost in 2020 to compute the result.) [19] Simes, supra note 14 at 83–88. [20] Id. [21] Mich. Rev. Stat. (1846) tit. 14, c. 62, §36-40. (See generally, MCL 544.37–40). [22] Simes, supra note 14 at 85. [23] Simes, supra note 14 at 86. [24] S.D. Codified Laws § 43-6-7. [25] MCL 554.93 [26] See generally, MCL 554.37. [27] MCL 206.51. [28] MCL 206.18(1)(c), 206.110(1)-(2).