You Can’t Take It With You

Ray Madoff believes that perpetuity undermines “broader societal values.” There are good reasons to sunset, true. But why should sunsetting be legally mandated?

Immortality and the Law: The Rising Power of the American Dead
by Ray D. Madoff
Yale, 2010
208 pp., $17.00

The thesis of Ray D. Madoff’s Immortality and the Law is that the deference American law affords the wishes of the dead “imposes significant costs on living individuals and threatens our most fundamental societal values.” The author’s perspective is, in a word, statist.

There are four chapters in all. One is devoted to postmortem private restrictions on the disposition of one’s body and one to safeguarding one’s postmortem reputation. The remaining two chapters deal with the postmortem disposition of one’s property, specifically transfers for the benefit of people (Chapter 2) and transfers in trust for charitable or other purposes (Chapter 3).

The focus of this review is on Chapter 3, in which Madoff seems to advocate the elimination, presumably by legislation, of the perpetual-duration charitable trust or corporation, while also calling for a reduction of the postmortem charitable deduction so that it falls in line with the less generous income tax deduction for lifetime charitable contributions.

This is not the place to debate whether allowing charitable trusts or corporations to have a perpetual duration makes for good estate planning, or whether maintaining the unlimited postmortem charitable deduction makes for good public policy. Thoughtful donors may well concur with some of the author’s conclusions. Many, for example, have been advocating for some time now that a charitable trust or corporation should be of limited duration so as to minimize the chances that it might be hijacked by those for whom upholding donor intent is not a concern, let alone a sacred trust. Others feel that the time has come for the politicians to cease employing the Internal Revenue Code as an instrument of behavior manipulation. What I intend to do here is question some of Madoff’s core assumptions. But first, some context.

For many centuries, the trust has served as a device for circumventing the state. Frederic William Maitland, the great Cambridge University trust scholar, opined over a century ago that the trust was the greatest achievement of English jurisprudence. Because of its protean nature, it allows the private citizen, together with his trust lawyer, to play cat-and-mouse games with the state. There are few legal tasks that a trust is not capable of performing, including getting around the provisions of some statute.

Already by the time of the War of the Roses (1455–85), most of the land in England was held “to use,” the “use” being a precursor to the modern trust. Holding land “to use” was a way of avoiding feudal dues. After extensive negotiations with the private landowners of the realm and their common law lawyers, Henry VIII managed to fetter somewhat—but only somewhat!—the hooves of the proto-trust. The trust, you see, has always been an unruly horse.

Fast forward to the United States in the 1880s. By then major industries had become entrusted to a relatively few individuals. In the words of Henry Adams: “The Trusts and Corporations stood for the large part of the new power that has been created since 1840, and were obnoxious because of their vigorous and un-scrupulous energy. They were revolutionary, troubling all the old conventions and values, as the screws of ocean steamers must trouble a school of herring.” The Sherman Anti-Trust Act was the government’s response to this concentration of private economic power.

In the last analysis, the trust, like fire, is neutral. It is just a tool. What matters is how the tool is employed. But, in a small corner of the legal academy, a debate is underway over the extent to which the creator or settlor of a trust, via its terms, may place restrictions on how the trust property should be invested. Take a direction to retain and manage a family’s closely held business. What if a diversified portfolio of marketable securities and bonds would make more sense, at least from a purely economic perspective? John H. Langbein, a professor at Yale Law School, suggests that the courts should override the wishes of the settlor in such situations, that the law of trusts should have an “intent-defeating” aspect to it. Above all else, he argues, the trust should exist for the benefit of the beneficiaries.

Jeffrey A. Cooper of Quinnipiac University School of Law suggests that things are much more nuanced when it comes to trusts. Trust property, he maintains, is for the benefit of the beneficiaries as that benefit is understood and articulated by the settlor, the one to whom the property originally belonged. If there is to be an objective one-size-fits-all standard that is “efficiency”-driven, then ultimately it will fall to the state to define “efficiency,” either by legislation or case law. One senses from Cooper’s writings that he does not think this is a good thing.

Madoff seems to be with Langbein on this one. “The cost of protecting donor’s intent has often been gross inefficiencies,” she writes, “since courts are directed to focus primarily on the donor’s intent and to pay only minimal attention to current societal needs.” (Replace “current societal” with “the beneficiary’s” and we have a page that is directly out of the Langbein playbook.) It is passing ironic that the public policy counter-argument to such collectivist sentiments was best articulated by Mao Zedong, the quintessential statist, in the 1950s: “Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting progress in the arts and the sciences.”

The charitable trust, which in tax parlance is referred to as a foundation, operates in a no-man’s-land between the private and the public. (So does the charitable corporation, which, for all intents and purposes, is a trust.) While a charitable trust is typically created by a private citizen with his or her own property, and while it is typically administered by a private individual or corporation, the state has traditionally inserted itself into the process in two ways. The state attorney general, usually an elected politician, is charged with its oversight. The court, also an instrumentality of the state, is charged with modifying its purposes under cy pres doctrine, should circumstances warrant. It would be naïve in the extreme to suggest that these governmental entities do not act out of political calculation when it comes to matters charitable—and this, quite apart from questions of tax policy. The notorious Ebitz case in Massachusetts is a classic example.

At issue in Ebitz v. Pioneer National Bank was the provision of a testamentary trust established “to aid and assist worthy and ambitious young men to acquire a legal education.” The will was executed in 1963 and allowed in 1970. The plaintiffs were female law students who made timely applications to the trustee for assistance from the fund. The applications were rejected on the ground that the testator had intended males, not females, to be beneficiaries of his largess.

The trial judge held that “[t]o exclude females as possible recipients of financial assistance from a trust fund established for the purpose of assisting qualified students interested in the pursuit of a legal education would constitute an unreasonable and arbitrary exclusion.” With that he ruled that the term “young men” meant “young men and young women.” The trustee appealed. The trial judge was upheld on appeal by the Massachusetts Supreme Judicial Court, which found the reference to “young men” ambiguous in the context of the entire instrument.

Thus does the public assert its authority over private funds. But it is not enough for Madoff, who asserts: “Two defining features of the law of charitable trusts make them particularly effective in allowing a donor to achieve a form of immortality: the focus on enforcing the donor’s intent, as opposed to serving broader societal values, and the ability for charitable trusts to exist in perpetuity.” As a general matter—leaving aside the capricious benefactions of the occasional eccentric donor, which the courts are fully equipped to deal with under the ancient cy pres doctrine—why is it a given that enforcing donor intent and “serving broader societal values” are mutually exclusive? And who or what is to make these generalized determinations as to “societal value”? Is not “society” in this context really a euphemism for the state?

Madoff makes a second problematic assumption, namely that assets that are “tied up” in perpetual charitable trusts are somehow unproductive: “Real problems are not being adequately addressed. Issues of environmental degradation, war and peace, hunger, infectious diseases, education, and multi-generational cycles of substance abuse and poverty are all problems in need of immediate resources. Yet in the pursuit of perpetuity, fewer resources are being devoted to these pressing issues.”

Is the author suggesting that, say, Boston College (where she teaches) should divest itself of all its real estate and become a tenant so that its real estate can achieve its optimum market potential? It does not seem so. If the reference is to intangible personal property such as equities and bonds, some clarification is in order. Why is a working investment portfolio not a societal resource? Even a trust checking account can make it possible for someone downstream to own a home. It is not as if trust cash is hidden under some mattress. Tying up a parcel of land in perpetuity is perhaps another matter. But there is nothing in the book about college dormitories and the like “starving the known problems of today.”

Her third problematic assumption is that an immediate charitable expenditure is preferable to investing charitable funds for the future: “Consider the example of a person with $1 million to commit to charity. If it is spent immediately, then society gets the immediate full value of the $1 million.” I suppose it depends upon the charitable purpose. But could it be in anyone’s interest for a worthy charitable educational institution whose economic viability is dependent upon tuitions not to invest at least some of its charitable benefactions in a rainy day fund? Can it really be said that “society” is benefited if all tuitions are forgiven for a year or two and then the economy tanks and the school goes under?

There is considerable dismissive commentary and speculation in Immortality and the Law about what motivates someone to make a postmortem gift in trust to charity:

“First, many people have a general desire to benefit society. Charitable transfers at death enable people to fulfill those desires at a time when they know they no longer need the resources for their own support. In addition, donating to charity is a way of expressing one’s identity. Finally, some charitable bequests are inspired by a desire to secure a form of immortality. For some religious believers, this can come in the form of preserving their souls (by financing good deeds or the saying of Masses). . . . The desire to make—or remake—one’s identity has no doubt provided a strong inspiration for much charitable giving.”

Whether this amounts to good psychology or bad psycho-babble, or something in between, is outside my area of expertise. But whatever the case, what is lacking is some explanation of why a donor’s personal religious or quasi-religious or existential motivations should be relevant to the issue of whether a perpetual charitable trust has social utility. Also lacking is a discussion of what could be the societal consequences of driving frustrated immortality-seeking prospective donors off-shore, or causing them to eschew charitable giving altogether in favor of immediate non-charitable gratification.

In the last analysis, one’s view as to whether a perpetual charitable trust, with its attendant tax benefits, has social utility will likely depend upon how much faith one has in the state and its ability to solve problems and protect our freedoms and individuality. Those who feel that the less economic power concentrated in the state, the better, will not find Madoff’s statist arguments particularly compelling. Having said that, the oversight of charitable trusts or corporations by the attorneys general of the states and by the courts of the states is, and always has been, politicized.

Thus, a prospective benefactor is well-advised to consult an experienced trust lawyer about what counter-measures may be available and appropriate in a given instance to reduce the chances of a “societal” trust-jacking. And it may well be that counsel will advise: “Stay away from the perpetual charitable trust. A sunset provision is the way to go.” This is not too different from what Madoff advocates—but for radically different reasons.

 

Charles E. Rounds Jr., a professor of law at Suffolk University Law School, is the author of 16 editions of Loring and Rounds: A Trustee’s Handbook and former outside counsel to the Franklin Foundation, the manager of a now-terminated 200-year-old accumulation trust established under the will of Benjamin Franklin.

This article was originally published as Reviews and Commentary in the Summer 2010 issue of Philanthropy magazine.