Guan’s blog


The rule against perpetuities

20 Jan 2014

The SPDR S&P 500 ETF, better known under its ticker symbol SPY, is one of the largest investment vehicles in the world, with $172 billion under management. You can trade it in a regular brokerage account.

What owners actually get is a share in the SPDR S&P 500 ETF Trust (or SPDR® S&P 500® ETF Trust), a trust organized under Massachusetts law. There is a trust agreement laying out the rules of the trust and the circumstances under which it can be terminated, with the assets presumably being returned to investors.

A number of events can trigger the termination of the trust. If none of those events happen, according to the prospectus:

The Trust is scheduled to terminate on the first to occur of (a) January 22, 2118 or (b) the date 20 years after the death of the last survivor of eleven persons named in the Trust Agreement, the oldest of whom was born in 1990 and the youngest of whom was born in 1993.

Terminating SPY could be quite disruptive. The tax consequences could potentially be bad; at the very least, it would involve a lot of legal fees to sort everything out so nothing bad happens. And it will happen 20 years after the last of those 11 kids dies.

The oldest of the SPY 11 is now 23 years old. He or she may have graduated college last year.

Who are SPY 11? Are they all still alive? Do they know that their lives are inextricably linked to the fate of billions of dollars worth of savings? Does this weigh on them? Has anyone taken out life insurance on them? Do they know each other? Do they celebrate birthdays together? Does someone from the trust check in on them from time to time? Are they allowed to travel on the same flight? Do they have savings invested in SPY? Have they formed a tontine?