'Dynasty Trust' Bill Still Alive In Legislature

Bill in Iowa Legislature threatens to weaken Iowa's property system; it would be a big mistake if this bill is allowed to become law, says ISU's Neil Harl.

Published on: Mar 9, 2012

The is a move afoot in the Iowa Legislature to repeal a law that prohibits establishment of so-called "dynasty trusts" in the state. "If this bill is allowed to become law, it would be a colossal mistake," says Neil Harl, professor emeritus of agricultural law at Iowa State University. "It would certainly weaken our property system, as we know it today."

Currently, Iowa law places a limit on how long land and other assets can be locked in a trust. The proposal would change that and allow assets to be held in a trust forever. Not 100 or 500 or 1,000 years, but forever. "Our market oriented economy works best if assets are freely transferable and can move easily to where the return on those assets is greatest," notes Harl.

Dynasty Trust Bill Still Alive In Legislature
'Dynasty Trust' Bill Still Alive In Legislature

We tend to take for granted Iowa's law against perpetuities—which prevents assets such as land from being locked up in a trust forever. "But the big banks in Iowa for more than a decade have been doing their best to destroy that important pillar of our private property system," he says. "And they're at it again in this session of the Iowa Legislature with a bill, H.S.B. 556, that would do just that."

Bill in the Iowa Legislature would do away with the current law in Iowa

The bill would do away with the current law, which is based on the Rule Against Perpetuities, which it dates from the late 17th century in England, Harl explains.  Basically this time-honored rule has placed a limit on how long land—and other assets—can be locked in a trust. Stemming from a court case in England in the 1670s, assets at present can be held in a trust for little more than 100 years at most.

Technically, the period assets can be held in a trust is for the duration of a class of measuring lives—such as all on one's grandchildren under the age of 10—plus 21 more years. The proposed legislation that is now in the Iowa Legislature would change all of that and allow assets to be held in trust forever.

Harl challenges the people who are pushing for this law to pass to "just imagine, only 1,000 years ago, in 1012, if those people with wealth had locked it up in trust forever, what would be the situation today? Where would we be today trying to acquire assets? Or if all of the land in the Louisiana Purchase had been immediately locked in a trust, forever? Our market-oriented economy works best if assets are freely transferable. That is not likely to happen when property is locked in a trust forever."

Another problem is the number of potential beneficiaries would mushroom

And just think of the number of beneficiaries in 150 years. "My great-grandfather bought 80 acres of farmland in Appanoose County on Nov. 13, 1863," says Harl. "He and his wife raised 11 children; their youngest was my grandfather."

"Had my grandfather conveyed that 80 acres to a dynasty trust—as they're now called—the number of beneficiaries today would be approaching 1,000 and would be scattered all over the globe. The 80 acres, with each beneficiary owning the equivalent of less than a tenth of an acre, would likely be growing up in weeds. And that was for just more than 148 years."

Research has indicated that with a husband and wife and two children, in 500 years the beneficiaries of such a trust would number more than 3.4 million. "It would change the way we view private property," says Harl. "It would be more like the Social Security trust fund—distant, unresponsive to the wishes of the individual beneficiaries and not viewed as part of the wealth accumulation process which is so prized in this country."

Risks associated with passing this piece of legislation are not worth taking

Harl says, "We do not dare risk one of the most precious features of private property ownership on the altar of economic development. That whistling sound over head is from assets on their way to South Dakota, a state where there no longer is a Rule Against Perpetuities."

"That's what is spooking the big banks in the state of Iowa," he adds. "The price we would pay for a few more jobs in this state is incalculable over time. Let your senators and representatives who serve you at the Statehouse in Des Moines know: This is one piece of legislation that should not be passed."