In the Spring 2015 issue of Top Producer magazine, columnist Paul Neiffer, better known as The Farm CPA, wrote about the risks and opportunities associated with dynasty trusts for farm families. The following letter to then-editor Jeanne Bernick from Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture at Iowa State University, is in response to that column. Read Neiffer's response to this letter here.
It was very, very disappointing to read, in the Spring edition of Top Producer, the column entitled, “Is a Dynasty Trust for You?” Quite frankly, I can think of no other event or series of events that would be as devastating, long-term, to our economic system, particularly in agriculture, as widespread use of such a trust. The concept was barred until the early 1980s by a statute enacted into law in every state in this country, based on a 1682 court case in England. That case decided that tying up land forever was against public policy.
That view prevailed in this country until “Wild Bill” Janklow, the governor of South Dakota in the early 1980s, convinced the South Dakota legislature to repeal that provision, called the Rule Against Perpetuities. The result, in the states that have eliminated the provision—and not all states have—is that land and other assets can be tied up in trust forever, and forever is a very long time. Had this happened 300 years ago, most of us would be tenants now—tenants of trusts set up mostly by the superwealthy in, say, 1815, of trusts that never end.
Why is that so dangerous? First, there is the idea that if one works hard and saves their money, they can some day own some land. That would be impossible if the trusts to last forever had been set up centuries earlier by the wealthiest property owners.
Second, our economic system is based heavily on free transferability of assets, which allows market forces to direct asset ownership into the hands of those who can make better economic use of the property. It is widely acknowledged that trustees of trusts are heavily concerned about being surcharged for making bad investment or management decisions. That factor rests with a heavy hand on keeping land in its present use, with many (if not most) trustees only reluctantly making improvements and, above all else, trying to avoid being sued by the beneficiaries.
The Hubbell family in Iowa, who were beneficiaries of a trust set up in 1903 that ran up against the Rule Against Perpetuities in 1983, has openly acknowledged, that the presence of the trust was a drag on economic development in downtown Des Moines. The ending of the trust marked a significant resurgence of economic activity in that area of the city.
Third, we simply do not know what will be the highest and best use for land, for example, even in rural America in the year 2115. With the hundreds and hundreds (if not thousands) of beneficiaries at some time in the future, the half-section of farmland that everyone thought was destined to continue to be farmland might very well be in the midst of a bustling suburb of a major city—and locked into a so-called dynasty trust set up in 2015.
Fourth, the heirs living in 2015 who might be cheering on the dynasty trust today, for what they think is a short-term gain, are likely to be replaced on the scene by third- or fourth-generation heirs who are likely to be scattered to the four winds by 2015. If each of those heirs has less than a 1% ownership interest in the trust by that time (which is almost certain), they are likely to have very little interest in the trust and its property. We are already seeing that, even with some second- and third-generation heirs.
Fifth, dynasty trusts are established to last forever. One aspect that promoters fail to reveal is that there would be no new income tax basis forever for property in such trusts as there is today. Recently, in a program on public radio, I was debating an heiress of the Standard Oil fortune, a great-granddaughter of John D. Rockefeller, who casually mentioned that she had been selling some stock which had come by inheritance from Rockefeller’s estate. The stock had passed down by inheritance to her mother who had recently died. The stock received a new income tax basis in her mother’s estate at the fair market value as of the date of her death, and she only had about $1 per share of gain to report for income tax purposes. I asked her, “would you have been as willing to sell the stock if the basis had been pennies per share (which would have been the case had there been no new basis since Rockefeller’s death)?” Her answer: no. I was really indifferent as it was and I would not have sold had there been a huge gain to report. Dynasty trusts, over time, would have so much gain that no one would want to sell. That clearly hobbles economic growth.
What all of this adds up to, I submit, is that tying up land (and other assets) forever is almost certain to be economically disadvantageous, commits the property to widespread (and disinterested) beneficiaries and locks the land into the hands of succeeding generations whether they like it or not.
My recommendation: think twice or even more times before committing to such a trust that has a rosy tint today.