The Estate

In 1961 the Supreme Court of California decided a case called Lucas v. Hamm, and in doing so it said something no court likes to say about the law.

The facts were unglamorous. A lawyer named Hamm had drafted a will for a man named Emmick. The will contained a provision that violated an old rule of property law, the provision was declared invalid, and the intended beneficiaries ended up settling with the family for seventy five thousand dollars less than the will would have given them. They sued the lawyer for malpractice.

The court held that the lawyer was not liable. Not because he had drafted it correctly, but because the rule he had broken was so notoriously difficult that a reasonably competent attorney could not fairly be expected to get it right.

The rule in question is called the rule against perpetuities. Law students dread it. It is the standard example of a legal doctrine that defeats intelligent people, phrased in a formulation that has to be read several times before it stops being a sentence and starts being a meaning: no interest in property is valid unless it must vest, if it vests at all, no later than twenty one years after the death of some person alive when the interest was created.

Read that again, slowly, and notice what it is actually about.

It is about the dead letting go.

Four hundred years of prying fingers loose

The rule emerged from an English case in 1682 concerning the Duke of Norfolk’s family, and the problem it was invented to solve is one that recurs whenever people become both wealthy and worried.

A rich man wants to control his property after his death. Not just to leave it to someone, but to dictate its use in perpetuity: this estate shall never be sold, it shall pass always to the eldest son, it shall be used for these purposes and no others, forever. The instruments for doing this existed. Trusts, entails, settlements. With enough legal ingenuity, a landowner could bind his property to his intentions for centuries.

English courts decided this was intolerable, and their reasoning was economic rather than sentimental. Property that cannot be sold cannot move to whoever values it most. Land locked in a dead man’s instructions falls out of the market and stays out. A country in which enough estates are tied up in perpetuity is a country where the productive use of land is set by people who died before anyone currently alive was born.

So the courts drew a line. You may reach into the future, but only so far. Roughly, you may control your property for the lifetimes of people who are alive when you write the document, plus another twenty one years for their children to reach adulthood. After that, it belongs to the living.

That is what all the tortured phrasing is protecting. A time limit on the grip of the dead.

And here is the thing I want to fix in your mind before the rest of this chapter, because everything follows from it. The rule against perpetuities exists because death alone was not sufficient. Even with mortality operating at full strength, even with every owner reliably dying on schedule, wealthy people found ways to project control forward, and society had to construct an additional legal mechanism to stop them.

That is the baseline. Four hundred years of specialized law, needed to force turnover in a world where everyone dies.

Now remove the dying.

The largest redistribution nobody voted for

Inheritance is the biggest transfer of wealth in any market economy, and it happens without legislation, without political fights, and without anyone being able to opt out.

Think about what death does to a fortune. It stops the strategy. The person who built the position, who understood the assets, who had the nerve and the relationships and the specific view of the world that made it work, is no longer there. The estate passes to people who did not build it. It gets divided among heirs, which cuts each piece. It gets taxed. It gets managed by someone with different judgment, different appetite, and usually less obsession.

Every culture has a proverb for what happens next. In English it is shirtsleeves to shirtsleeves in three generations. In Lancashire it was clogs to clogs. The Chinese version says wealth does not survive three generations. These sayings exist everywhere because the phenomenon is everywhere, and the phenomenon has a mechanism, and the mechanism is death.

Thomas Piketty’s central observation is that when the return on capital exceeds the growth rate of the economy, wealth concentrates. Capital compounds faster than everything else, and the gap between the owners and everyone else widens. The formulation is usually written as r greater than g, and it has become one of the most argued about inequalities in modern economics.

But notice that the concentration Piketty describes is slow. It takes generations to become socially visible, and it repeatedly reverses. His French data make the shape of it plain. The annual flow of inheritance ran at twenty to twenty-five percent of national income from 1820 through 1910. By 1950 it was under five percent. By 2010 it was back to about fifteen.

That is not a ratchet. It is a U, and something drove it down to the bottom of the U before it started climbing again.

What interrupts it?

Wars and depressions, in the twentieth century case, which destroyed capital on a scale nothing else has matched. But underneath those episodic catastrophes runs the constant one. Every fortune is handed, on a schedule set by biology, to someone who did not make it.

Seventeen thousand times

Let me make the compounding concrete, because the number is more startling than the argument.

Suppose you have capital earning five percent a year after inflation. That is not an aggressive assumption. It is roughly what a diversified portfolio of productive assets has delivered over long historical periods.

Over thirty years, a working career, that multiplies your money by about four and a third. Respectable. This is the arithmetic of a successful life.

Over two hundred years, the same five percent multiplies your money by about seventeen thousand.

Not seventeen thousand dollars. Seventeen thousand times. A million becomes seventeen billion, in real terms, at an unremarkable rate of return, with no brilliance required at any point. Just continuity.

That number is the entire chapter. Compounding at ordinary rates produces absurd outcomes over extraordinary periods, and the only reason we do not observe absurd outcomes is that nobody has ever had an extraordinary period. The compounding always gets cut. The owner dies, the estate splits, the tax lands, the heir sells the business to buy a house in the south of France.

Remove the interruption and r greater than g stops being a slow drift that societies argue about. It becomes a fixed point. Capital accumulates without limit in the hands of people whose strategies never change, whose risk appetite never resets, and who never hand anything to anyone.

And the resulting distribution is not merely unequal. It is frozen. That distinction matters more than it sounds. Societies tolerate a great deal of inequality when the positions turn over, because there is a story available in which the arrangement is provisional. Remove turnover and you have removed the story, and what is left is not a market outcome. It is an aristocracy, in the original and precise sense of the word: a permanent stratum, defined by birth, that cannot be entered.

The fortune that did not break

The proverb has been carrying a great deal of weight in this chapter, and it should not carry it alone.

Shirtsleeves to shirtsleeves is a saying, not a finding. It describes a strong central tendency and says nothing about the tail, and the tail is where the argument of this book actually lives. If the claim is that death reliably breaks concentrated wealth, then the fortunes that were not broken are the evidence that matters, because they are the cases where the mechanism was tested and did not fire.

There are such cases. They are rare, and the way they achieved it is the most useful thing in this chapter.

Consider the Wallenbergs of Sweden. The family bank was founded in the eighteen fifties. Six generations later the family still exercises effective control over a substantial share of Swedish industry, through a holding company and a set of foundations, across firms whose names are on products sold in every country in the world. That is not a fortune that survived three generations. It is one that survived six, through two world wars, a Swedish tax regime that was for decades among the most redistributive on earth, and the ordinary attrition of heirs who might have preferred the money.

Ask how, and the answer is not luck and not brilliance in any individual generation.

At a decisive moment, Knut Wallenberg transferred his entire fortune into a foundation before he died.

Sit with what that sentence does. The proverb depends on a specific chain of events: the owner dies, the estate is valued, the tax lands, the assets are divided among heirs, and the heirs, who did not build it and mostly cannot maintain it, disperse the position. Every link in that chain requires the property to pass through an individual’s estate.

Property held by a foundation does not pass through anybody’s estate. There is no death to trigger the transfer, because the owner is an institution and institutions do not die on a schedule. There is no division among heirs, because the heirs are not owners. There is no valuation event and therefore, in most jurisdictions and to a large extent, no transfer tax. The family’s relationship to the capital changes from ownership to stewardship, exercised through board seats and appointments rather than through title.

Today that structure runs through more than a dozen foundations holding assets worth tens of billions of dollars, and the operative feature is not the size. It is that no individual member can withdraw the money. The design that protects the fortune from estate taxes is the same design that protects it from the heirs, and those turn out to be the same problem.

The Rothschild case is different in its mechanics and identical in its logic. What is usually described as a banking dynasty was in structural terms a network: separate houses in separate countries, bound by intermarriage and by a partnership agreement, so that the failure or the death or the incompetence of any single branch did not take the whole with it. Redundancy was built in deliberately, at some cost, by people who had watched other merchant families disappear in exactly the way the proverb describes.

So the pattern in the surviving cases is consistent, and it is the opposite of the comforting story.

These fortunes did not survive because death failed to arrive. Death arrived on schedule for every member of both families. They survived because somebody, usually at a moment of clear headed pessimism, built a machine specifically designed to be indifferent to it.

What the survivors prove, and what they do not

This cuts two ways and it is worth being precise about both.

It strengthens the chapter’s central claim rather than weakening it. Look again at what the rule against perpetuities was for, and at the four centuries of legal ingenuity described at the start of this chapter. The rule existed because wealthy people kept trying to build exactly these machines. The trust, the entail, the settlement, the foundation: every one of them is an attempt to project control past the point where the owner stops existing. Courts pushed back for four hundred years, and the pushing back was necessary, and it was necessary precisely because death alone was never sufficient.

The survivors are therefore not counterexamples to the mechanism. They are the documented exceptions that prove how much work the mechanism does, and how much effort it takes to escape it. Escaping mortality’s grip on property has historically required the best lawyers in Europe, an unusual degree of family discipline, and a willingness to give up personal ownership in exchange for permanence. Very few families have managed all three at once.

Now remove the death.

Every one of those devices is a prosthesis. The foundation exists to simulate the continuity of a person who is going to stop existing. The board seat exists to transmit a judgment that will otherwise be lost. The partnership across branches exists because any given principal may die at an inconvenient moment. All of this apparatus, all of the legal expense and the family governance and the careful constitutional drafting, is there to solve one problem.

A founder who does not age has no need of any of it. There is no succession to plan, no intent to preserve against drift, no heirs to discipline, and no transfer to shelter. The most sophisticated instrument for defeating mortality is simply not required by somebody mortality is not going to reach.

Which means the correct reading of the Wallenberg case is not that permanence is already possible. It is that permanence has until now been available only to those who could afford to construct it, and only in an attenuated form, at the price of surrendering personal control to an institution. The thing being purchased at enormous expense is about to become the default condition of anyone who takes a treatment.

The cost of dynastic permanence is falling to zero.

There is one honest complication, and Chapter 13 will return to it. This book argues later that perpetual foundations reliably fail in one of two directions, drifting from the founder’s intent or becoming faithfully irrelevant to a changed world. The Wallenberg structure has now run for well over a century without obviously doing either, which is a genuine strain on that argument.

The distinction that probably rescues it is between a foundation that pursues a purpose and a foundation that holds a business. A charitable foundation is given an intent by a dead person and must apply it forever, which is the trap. A holding foundation owns operating companies that face competitors, hire and fire, enter and exit markets, and are disciplined continuously by people who are not the founder. Its relevance is renewed from outside, by the market, not preserved from within.

That distinction is real, and it may not be sufficient, and a reader is entitled to weigh it. It is noted here rather than buried because the alternative is to leave the strongest case against a later chapter out of the earlier one where it naturally arises.

The machinery we already dismantled

Here is the part that should make you uncomfortable, because it is not a projection. It already happened.

Beginning in the 1980s, a number of American states abolished or drastically extended their rule against perpetuities. South Dakota went first, in 1983. Delaware, Alaska, Nevada, Idaho, Wisconsin and others followed. Some eliminated the rule outright. Others replaced it with limits so long, several centuries, that they amount to the same thing.

The motive was not ideological. It was competitive. Trusts generate fees, and fees generate jobs and tax revenue, and a state that lets a trust run forever will attract trust business from states that do not. There was a tax dimension too. Federal changes in 1986 created a strong incentive to shelter wealth in structures that could skip generations, and a trust that never terminates is the ideal vehicle for that purpose.

So a race began, and it was a race to see which state would let the dead hold on longest.

The product this created is the dynasty trust: a structure that holds assets in perpetuity, distributing to descendants indefinitely, never passing through anybody’s estate, and therefore never triggering the transfer taxes that estates trigger. Assets held under these arrangements in the leading states now run into the hundreds of billions of dollars, and a series of journalistic investigations over the past few years has made the scale of it public.

I want to state the sequence plainly, because it is the most consequential thing in this chapter.

For four hundred years, common law jurisdictions maintained a rule whose only purpose was to force property to return to the living. In the space of about thirty years, and for reasons that had nothing to do with anything in this book, a significant part of the developed world took that rule apart in exchange for trust management fees.

We disabled the anti permanence machinery first. The permanence is arriving second.

Firms die too, and that is the point

The same argument runs through the corporate sector, and it is easier to see there because the data is public.

Companies are mortal. They fail, they get acquired, they get broken up, they slowly become irrelevant and are quietly removed from the index. The average tenure of a company on the S&P 500 was about thirty-three years in the mid 1960s. By 2016 it was around twenty-four, and the forecasts have it heading toward the low teens within a few years. On current churn, roughly half the index turns over in a decade.

Economists call this creative destruction, after Joseph Schumpeter, and it is understood to be the mechanism by which capitalism reallocates resources. New firms with better methods take capital, customers and staff away from old firms with worse ones. The old firms die. This is not a failure of the system. It is the system.

Notice that the process requires the death of institutions, and that the death of institutions has historically been tied to the mortality of the people running them. Founders age. They lose their edge, or their nerve, or their grip on what customers now want. Succession is forced on them, and succession is where a great many powerful companies lose their way, and that losing of the way is what makes room for the next thing.

Two developments are now pushing against this at once.

The first is already here. Dual class share structures, in which founders hold shares carrying ten or more votes each, have become normal in technology listings over the past two decades. The explicit purpose is to insulate the founder’s control from the market’s opinion, permanently. The founder can be outvoted by no one.

The second is the subject of this book. Combine permanent control with a founder who does not age, and the concept of corporate succession simply ceases to have a referent. There is no handover, because there is no one to hand to and no occasion that forces it.

A world where firms do not die is a world where creative destruction is missing its second half. We would keep the creation and lose the destruction, which sounds like an improvement and is not, because the destruction is how the resources get released.

What death was doing here

Let me summarize the job, since this chapter has covered a lot of ground.

Death performs a compulsory, universal, unappealable redistribution of capital on a schedule that nobody controls. It cuts every accumulation before the compounding gets absurd. It transfers assets to people who did not build them and mostly cannot maintain them. It forces institutions into succession crises that open room for competitors. It does all of this without a vote, without a policy, and without any way for the wealthy to opt out, which is the feature that four centuries of ingenious lawyers have been trying and failing to engineer around.

Nothing else in our institutional repertoire does this. Estate taxes are a pale imitation, they are avoidable, and they are politically fragile precisely because they are visible as choices in a way that mortality is not.

We have no backup for this function. And unlike the discount rate, which will drift gradually and give us time to notice, this one has a sharp edge. The moment the first cohort of very long lived, very wealthy people exists, the redistribution stops for them and continues for everyone else.

That is not a story about the year 2200. Given how these things distribute, it is a story about a few thousand people, quite early, and the rest of us watching.