North Carolina has Repealed the Rule Against Perpetuities
Effective August 19, 2007, North Carolina repealed the Rule Against Perpetuities, which means that multi-generation dynasty trusts can be created in North Carolina. Previously trusts could not last longer than 90 years or a life in being plus 21 years.
However, some questions have arisen about possible conflicts with other North Carolina laws, which has led to caution on the part of attorneys in recommending dynasty trusts until the questions are addressed. Click “Continue Reading” to view a memo by attorney Liz Arias, Co-Chair of Legislative Committee for the Estate Planning and Fiduciary Law Section of the North Carolina Bar Association.
… I thought it appropriate to post the following response to inquiries the Legislative Committee has received for clarification of the effect of the recent enactment of NC Gen. Stat. 41-23 regarding the application of the Rule Against Perpetuities to North Carolina trusts.
On August 19, 2007, NCGS §41-23 took effect to repeal the Rule Against Perpetuities as it relates to trusts administered in this state (See, NC Session Law 2007-230). The effect of the language of NCGS §41-23 is to repeal former North Carolina law which prohibited remoteness of vesting of interests in a trust beyond 90 years or lives in being plus 21 years (See our uniform statutory rule against perpetuities located at NCGS §41-15). Thus, under 41-23, there is no longer a limitation on when interests in trust must vest. As a result, dynasty trusts may now be created in North Carolina.
However, the new statutory approach adopted in NCGS §41-23 does codify another North Carolina common law perpetuities prohibition– specifically, the prohibition against restraints on alienation. Under NCGS §41-23, a grantor of a trust cannot create a restraint on alienation of trust property that lasts beyond the permissible period described in the statute, which is defined under section (a) of the statute as lives in being at the creation of the trust plus 21 years.
The effect of the new statutory approach is to permit North Carolina trusts to exist in perpetuity provided that the trustee (or some other person) has the absolute power to sell the trust’s property (i.e., the power to either convey an absolute fee in possession in real property or convey full ownership of personal property).
Since the enactment of NCGS §41-23, a question has been raised as to the impact of a specific provision of the North Carolina Constitution on NCGS §41-23. Article I, Section 34 of the NC Constitution provides, “Perpetuities and monopolies are against the genius of a free state and shall not be allowed.” In Mercer v. Mercer, 230 N.C. 101, 103 (1949), the North Carolina Supreme Court referred to Article I, Section 34 of the North Carolina Constitution in holding that the rule against perpetuities applied to private trusts. This has raised the question among practitioners as to whether the repeal of the RAP as it applies to remoteness of vesting and the substitution instead of a prohibition against restraints on alienation of trust property which endure past the permissible period will satisfy the constitutional mandate of Article I, Section 34 of the NC Constitution.
The Legislative Committee believes that 41-23 is constitutional and is currently looking into how to resolve any potential conflict between the NC Constitution and 41-23. However, given the uncertainty that has been raised regarding the effect of the NC Constitution on 41-23, it is the Committee’s understanding that most practioners are not recommending that clients currently enter into NC dynasty trusts.
A separate question has been raised regarding the impact on any recently created North Carolina dynasty trusts should NCGS §41-23 be declared unconstitutional. The Uniform Statutory Rule Against Perpetuities (USRAP), when enacted in 1995, superseded the NC common law as it relates to perpetuities in private trusts. However, NCGS §41-23 states that USRAP no longer applies to trusts in North Carolina. Thus, if NCGS §41-23 were struck down as unconstitutional, it is unclear whether USRAP would automatically be revived so as to apply a 90-year wait and see perpetuities approach to recently created dynasty trusts whether the General Assembly would have to re-enact NCGS §41-15 in order to make it applicable.