New Jersey has abolished its "rule against perpetuities" so that New Jersey "dynasty trusts" can now remain in place in perpetuity.
New Jersey's rule against perpetuities generally required a trust to terminate and vest its property in its beneficiaries 21 years after the death of certain designated individuals who were alive when the trust was created. (If the instrument did not require this vesting, certain trusts created in or after 1991 would meet the rule if they actually vested within 90 years after creation.)
Many of our clients have aggressively planned for the use of their generation-skipping tax exemptions to transfer their assets free from gift, estate and generation-skipping taxes for as long as the rule against perpetuities would allow (usually about 100 years).
Many flexible, generation-skipping trusts have been created where distributions of income and/or principal may be used for the benefit of children, grandchildren, and possibly great-grandchildren, with the understanding that these generation-skipping, tax-exempt trusts will not be subject to the imposition of gift, estate, or generation-skipping taxes, as they pass from one generation to the next. If other assets are available to the trust beneficiaries, the beneficiaries would typically be advised to consume those assets, which would otherwise be subject to a transfer tax, before substantially tapping into these trusts which pass through the generations transfer tax-free. However, until recently, in New Jersey we were required to terminate this highly-favorable, multi-generational estate tax planning at the expiration of the applicable perpetuities period. The New Jersey Trust Modernization Act of 1999 (the "Act") has now changed the landscape of "dynasty planning" in a very positive way by repealing New Jersey's rule against perpetuities.
Consequently, trusts can now be created to last for as long as the creator of the trust wants them to last, even in perpetuity. This allows people to create "dynasty trusts" of infinite duration. All clients who are now interested in "generation skipping" their estate plans may do so in perpetuity (while the IRS and the law allows). Clients who previously used generation-skipping techniques in their estate plans may wish to modify their existing plans to extend these benefits into perpetuity.
The Act applies to future interests (such as the interests of beneficiaries in a trust) and powers of appointment that are created on or after July 9, 1999. It will apply to future interests and powers of appointment created prior to July 9, 1999 only if (1) the interest or power was created pursuant to the laws of another state which does not have a rule against perpetuities in effect, and (2) after July 9, 1999, New Jersey law is made applicable to the interest or power because the situs of the trust is transferred to New Jersey, the law governing the trust is changed to New Jersey law, or for some other reason New Jersey law is made applicable to the trust.
The Act also provides some relief for interests or powers created prior to July 9, 1999, but which do not meet the requirements above for application of the Act. If a judicial proceeding is commenced on or after July 9, 1999, and a nonvested property interest or power of appointment created before July 9, 1999, is determined in that proceeding to violate the rule against perpetuities, an interested person may petition the court to reform the disposition of the property in a manner which most closely approximates the transferor's manifested plan of distribution while at the same time complying with the rule against perpetuities.
Individuals establishing trusts for family members often would like those benefits to be available indefinitely to future generations. This was formerly disallowed, but it is now possible under the Act. Existing wills can be easily modified to include this feature. In certain cases, even existing trusts may be modified in this respect. You may want to revisit your wills and trusts in light of the exciting new opportunities now available under the Act.