Rule Against Perpetuities: Powers of Appointment, Saving Clause
The testator or grantor often specifies the beneficiaries of probate or trust property. However, sometimes the testator or grantor will allow someone else to designate the beneficiary of certain property, giving that person a power of appointment. The property subject to the appointment is called the appointive property and the possible beneficiaries are called permissible appointees. Because powers of appointment create future interests in the appointive property, powers of appointment are also subject to the Rules Against Perpetuities (RAP).
When considering how powers of appointment are limited by the RAP, 2 factors must be considered:
- whether the power of appointment is a general or special power;
- and whether it was created inter vivos or from a will.
Either the power itself or the property interest created by the power may be limited by the RAP. Because the purpose of the Perpetuities Rule is to prevent restraints on the alienation of property for extended periods of time, any interest or power that prevents the disposal of the property is subject to the perpetuities rule.
If the donee holds a general power of appointment, then since the donee is considered the owner of the appointive property, the power satisfies the Perpetuities Rule, if the power is either exercisable, even if it is actually exercised after the perpetuities period, or fails within the perpetuities period. This comports with the Perpetuities Rule because the holder of a general power of appointment is free to dispose of the property as she wishes, whenever she wishes.
However, the donee holding a testamentary power of appointment is considered an agent of the donor and not the actual owner of the appointive property. Since the donee of the testamentary power cannot freely dispose of the property, the power is subject to the RAP. If there's any possibility that the power can be exercised after the perpetuities period, then it is void.
A special power of appointment is treated the same as a testamentary general power of appointment, since both prevent the donee from freely disposing of the property: for it to be valid, it must not be exercisable after the perpetuities period.
The trustee that has discretionary power over trust income or principal is subject to the same rules as a special power of appointment, because the discretionary power is a special power of appointment that allows the trustee to appoint trust income or principal to a beneficiary. Hence, the trustee's discretionary power should be limited to persons living when the power is created plus 21 years, which categorically limits the exercise of the power to within the perpetuities period.
Since the holder of a general inter vivos power of appointment is considered the owner of the appointive property, the perpetuities period begins when the power is exercised. However, the perpetuities period begins for a general testamentary power or special power when the power is created, since the property does not vest until later.
To determine whether a testamentary power or special power violates the rule, some courts use a so-called second-look doctrine, where the courts will consider the actual facts pertaining to the exercise of the appointment to see if it violates the rule. If it is clear from the facts that the rule will not be violated, then the power is not void even if it would be void based solely on the text creating the appointment.
If a future interest violates the rule against perpetuities, then the property interest reverts to the donor of the interest or to his estate, which usually does not serve the purpose of the creating instrument. To prevent this, almost all wills and trust documents, especially those drafted by attorneys (both to carry out the testator's intentions and to prevent malpractice claims against them), have a saving clause, stipulating that if there is a possibility that a trust will not terminate within the perpetuities period, then the trust will terminate 21 years after the death of the last beneficiary living when the trust was created and that all trust property will be distributed to the income and principal beneficiaries in the same proportion as was stipulated in the trust document.
Sometimes the court itself, under the cy pres doctrine, will add the saving clause to reform the document so as to carry out the donor's intent as near as possible but without violating the Perpetuities Rule.
Example: Saving Clause from the will of Elvis A. Presley
Law Against Perpetuities
(a) Having in mind the rule against perpetuities, I direct that (notwithstanding anything contained to the contrary in this last will and testament) each trust created under this will (except such trusts as have heretofore vested in compliance with such rule or law) shall end, unless sooner terminated under other provisions of this will, twenty-one (21) years after the death of the last survivor of such of the beneficiaries hereunder as are living at the time of my death; and thereupon that the property held in trust shall be distributed free of all trust to the persons then entitled to receive the income and/or principal therefrom, in the proportion in which they are then entitled to receive such income."