• The money was to be lent out at 5% interest to young married artisans (tradesmen) starting their businesses, with the goal of fostering economic self-reliance.
• For the first 100 years (until 1890), the funds would accumulate through interest and repayments.
• After 100 years, 75% of the accumulated principal could be used for public works: in Boston, for infrastructure like water systems; in Philadelphia, for similar civic improvements.
• The remaining 25% would continue to accumulate for another 100 years (until 1990), after which the full amount would be distributed to the respective cities and states for public purposes.

Franklin’s rationale was rooted in Enlightenment optimism about progress and economics. He calculated that, with compound interest, the funds could grow exponentially—potentially to millions—benefiting society far into the future. He was influenced by his own experiences as a printer and inventor, emphasizing thrift and investment.What Happened:

• Growth and Initial Success: The funds did grow significantly due to compounding. By 1890 (after 100 years), Boston’s fund had reached about $400,000, and Philadelphia’s about $173,000 (adjusted for inflation and management). Portions were used as planned: Boston funded the Franklin Trades School (now Franklin Institute of Boston), and Philadelphia supported the Franklin Institute for scientific education and public works.
• Challenges and Legal Issues: Over time, the funds faced hurdles. Inflation eroded value, and the original lending model became outdated (fewer artisans needed loans in an industrialized economy). Legal challenges arose, including court battles over how to interpret Franklin’s intent in a modern context. For example, in the 1950s-1960s, Boston’s trustees sued to break the trust restrictions, arguing the original terms were impractical. Courts allowed modifications under the cy-près doctrine (which permits altering charitable trusts to fulfill the donor’s intent when literal compliance is impossible).
• Final Outcome (by 1990): After 200 years, Boston’s fund had grown to about $5 million (far less than Franklin’s projected $20-30 million due to conservative investments and economic factors). It was used to establish the Benjamin Franklin Institute of Technology and scholarships. Philadelphia’s fund reached around $2 million and funded apprenticeships, scholarships, and the Franklin Institute’s programs. Both cities continue to benefit, but the funds are now managed as endowments rather than strict accumulations. The experiment demonstrated compounding’s power but highlighted practical limits like inflation, legal rigidity, and changing societal needs.

Franklin’s idea inspired later philanthropists, including Jonathan Holdeen, but also exposed vulnerabilities in long-term trusts to legal scrutiny and economic realities.The Holdeen Trusts and Why They FailedJonathan Holdeen, a New York lawyer and investor (1893-1967), was fascinated by Franklin’s model and sought to scale it up dramatically. Between 1944 and 1955, he created multiple irrevocable trusts (often called “cumulative endowments”) to accumulate income for extraordinarily long periods—typically 500 to 1,000 years—before distributing the principal to the Commonwealth of Pennsylvania for public purposes like education. Holdeen’s vision was utopian: he believed governments should replace taxation with massive endowments that grow through compounding, eventually funding all public expenses. He estimated that modest initial investments could grow to trillions or more, potentially making Pennsylvania (and humanity) immensely wealthy.Key features of the trusts (based on the provided court documents):

• Structure: Holdeen placed modest sums (e.g., securities) into trusts administered in Pennsylvania. Trustees (often family members like his daughter Janet Adams and son Randal Holden) were to accumulate most income, paying only a tiny fraction (“expendable income”) annually to an immediate charitable beneficiary, the Unitarian Universalist Association (UUA), for religious and educational uses. The rest compounded until the trust’s end (e.g., 2444 AD for a 500-year trust), when the massive principal would go to Pennsylvania.
• Example (Trust 45-10, 1945): One-fiftieth of income (multiplied by years elapsed since 1944) was “expendable” for the UUA; the rest accumulated for 500 years before payout to Pennsylvania.
• Tax Motivations: Holdeen claimed deductions for charitable contributions, arguing the trusts were valid charities. He also merged some trusts (e.g., 44-10 into 45-10) to consolidate assets.
• Scale: By the 1970s, accumulated income reached over $12 million across trusts. Holdeen created at least five such long-term trusts, plus others with family beneficiaries.

What Happened and Why They Failed:

• Tax Disputes (1950s-1960s): The IRS challenged the trusts’ validity for tax purposes. In Holdeen v. Ratterree (1959 appellate case, provided), the Second Circuit ruled that Holdeen retained excessive control over some trusts (e.g., influencing investments as a “de facto trustee”), making their income taxable to him under IRC § 22(a) (treating him as substantial owner). However, for Trust 45-10, the court found insufficient control, so income wasn’t taxable to him. In the 1960 district court case (provided), the court upheld a merger of trusts but invalidated deductions for charitable contributions due to the “remoteness” of Pennsylvania’s benefit (500+ years away) and the scheme’s potential to concentrate wealth harmfully. Holdeen couldn’t deduct the gifts as charitable under IRC § 23(o)(1) or § 170(c)(1), as the long accumulations destroyed the “charitable nature” by being against public policy.
• Invalidation by Pennsylvania Courts (1979): In the key 1979 Pennsylvania Supreme Court case (In re Trusts of Jonathan Holdeen, provided), the Orphans’ Court and Supreme Court declared the accumulation provisions invalid from inception. The trusts violated Pennsylvania’s rule against unreasonable accumulations (adopted from James Estate, 1964), which limits charitable trust accumulations to “reasonable” durations based on purpose and public policy. Accumulating for 500-1,000 years was deemed “unreasonable, charitably purposeless, and contrary to public policy” because:
  • It tied up capital unproductively for centuries, harming current generations.
  • The massive future sums (potentially “nine million billion billions”) could disrupt economies or governments.
  • Holdeen’s scheme aimed to “jeopardize but not extinguish” taxation, seen as subversive.
• Outcome: Accumulated income was distributed immediately to the UUA (per Holdeen’s fallback clause for “income not lawfully subject to accumulation”). Pennsylvania got nothing. Trustees appealed but lacked standing (their interest was merely in perpetuating the trusts, not a substantive right). Holdeen’s will (1967) echoed this vision, but his overall plan collapsed due to judicial intervention.

Reasons for Failure:

• Excessive Control: Holdeen’s de facto influence (e.g., directing investments) made him taxable as owner in some cases.
• Unreasonable Accumulations: Courts viewed ultra-long terms as against public policy, prioritizing current societal benefits over speculative future windfalls.
• Tax Invalidity: Remoteness and contingencies (e.g., surviving 500+ years) negated charitable deductions; the IRS saw it as tax avoidance.
• No Vesting: Interests didn’t vest timely, and the scheme clashed with equity principles favoring productive use of wealth.

The Legal Problem with Perpetuities, Loopholes, and a Modern Holdeen-Style TrustThe Legal Problem: Rule Against Perpetuities (RAP) and Accumulations

• RAP Basics: This common-law rule (codified in many states) prevents “dead hand” control by requiring future interests in property to vest (become certain) no later than 21 years after a “life in being” at the trust’s creation. Violative trusts are void ab initio. It aims to prevent perpetual tying up of property, promoting alienability and economic circulation.
• Accumulations Rule: Separate but related, this limits how long trust income can be accumulated (not distributed). In Pennsylvania (as in Holdeen’s case), accumulations must be “reasonable” for charitable trusts (Restatement (Second) of Trusts § 401); ultra-long periods are void as contrary to public policy (e.g., starving current needs for hypothetical future benefits).
• Holdeen’s Issue: His trusts violated both—interests vested centuries later, and accumulations were unreasonable, leading to invalidation under public policy doctrines.

Loopholes in Some States:

• Many U.S. states have reformed or abolished RAP via the Uniform Statutory Rule Against Perpetuities (USRAP) or outright repeal, creating “dynasty trust” or “perpetual trust” regimes. These allow trusts to last indefinitely if structured properly (e.g., as irrevocable, with spendthrift clauses). Reforms started in the 1980s-1990s to attract wealth management business, offering tax advantages (no state income tax on trusts) and asset protection.
• Key loopholes: No time limit on vesting; accumulations allowed if not “unreasonable” (courts defer to donor intent in pro-trust states). Charitable trusts get extra leeway under cy-près if needed.

Modern Version of a Holdeen Trust That Could Survive Legal Challenge: A modern “Holdeen 2.0” could emulate Franklin/Holdeen by funding a long-term accumulation for public/liberty causes (e.g., inspired by the “Bitcoin Freedom Fund” or “Future of Freedom Fund” posts, using crypto for high-growth potential). To survive:

• Structure:
  • Perpetual Dynasty or Charitable Trust: Make it a non-charitable dynasty trust (benefiting descendants or a foundation) or a charitable perpetual trust. Accumulate income indefinitely, paying minimal “expendable” amounts to a current charity (e.g., a liberty-focused org like the Mises Institute). At a distant trigger (e.g., 500+ years or a condition like “when Bitcoin reaches X value”), distribute to a government or public entity.
  • Fallback Clauses: Include Holdeen-style provisions: If accumulations are invalidated, divert to the current charity (avoids total failure).
  • Asset Choice: Use high-growth assets like Bitcoin (as in the posts), which could compound exponentially without traditional interest limits. The 2022 “Bitcoin Freedom Fund” post proposes a trust accumulating Bitcoin for 1,000 years to fund libertarian causes, echoing Holdeen.
  • Governing Law Clause: Specify a pro-trust state’s law to govern.
  • Tax Strategy: Qualify as charitable for deductions (IRC § 170), but avoid Holdeen’s control pitfalls—use independent trustees. For non-charitable, use grantor trust rules carefully.
  • Avoid Public Policy Challenges: Frame as beneficial (e.g., funding education/liberty), not subversive like Holdeen’s anti-tax goal. Limit to “perpetual” without fixed end-date to sidestep reasonableness tests.
• Legal Survival Odds: In RAP-abolished states, perpetual duration is fine if no vesting issues (e.g., use powers of appointment). Accumulations are upheld if not wasteful. Courts could still strike under general equity if “unreasonable” (e.g., via cy-près), but these states are deferential. Test via declaratory judgment early.

Best State to Try It In:

• South Dakota: Top choice. It abolished RAP in 1983 (S.D. Codified Laws § 43-5-8), allows perpetual trusts, has no state income/fiduciary tax, strong asset protection (e.g., against creditors), and a trust-friendly court system. It’s a hub for “dynasty trusts” (e.g., for families like the Waltons). No accumulations limit for charitable trusts, and it’s open to innovative assets like crypto. The state’s Trust Task Force actively promotes such structures, reducing challenge risks. Alternatives: Delaware (similar, but slight accumulations limits) or Alaska (pioneered reforms but higher fees). South Dakota edges out for low costs and flexibility.