Rule Against Perpetuities

The Rule Against Perpetuities limits the term of most trusts, a common law rule to limit dead hand control through future interests created in a will or trust document. Dead hand control is conditioning a bequest or devisement to a beneficiary, such that they will only receive the gift if they abide by the conditions of the gift. The Rule Against Perpetuities (RAP) requires that all future interests must vest within any lifetime of a person living at the time the interest is created + 21 years.

The purpose for the rule is to limit dead hand control, so that dead hand control does not persist indefinitely, where it cannot respond to current events that may cause the inefficient allocation of economic resources. It can also cloud property titles for many years. The efficient allocation of resources requires that property be put to its best use, which is determined economically by who is willing to pay the highest price for it. However, when property has future interests attached to it, the current possessor cannot dispose of it since the property goes to someone else already designated, either by identification or by a contingency, sometime later. Only an owner with fee simple absolute title is free to dispose of her property — hence, the Rule's requirement that someone gain fee simple title or absolute ownership of the property within the perpetuities period.

It is reasoned that the creator of the future interest — either the testator of a will or the grantor of a trust — knows how to best distribute his property because he knows his beneficiaries, his property, and what his objectives are in light of contemporary circumstances. However, as time passes, beneficiaries die, property changes, and circumstances change. The originator of the future interest cannot foresee these changes, and, hence, cannot know the best use of the property.

The RAP does not require that a future interest must vest, but only that it cannot vest after the perpetuities period.

Because the Rule was developed ad hoc by the courts, both in the United States and in England, over the centuries, it originally applied only to realty, but is now extended to personalty, especially intangible assets, such as stocks, bonds, other investments, patents, and copyrights.

The lifetime of the person selected to measure the perpetuities period is called the measuring life (aka validating life), adding 21 more years to determine the perpetuities period. Any person can be selected, even someone who is totally unrelated to the donor of the future interest — even a celebrity. A measuring life can also be a child in utero since common law considers the beginning of a life to be at conception. Although any person can be used as a measuring life, if that person is not specified in the document creating the future interest, it is assumed to be the person who has a present, possessory interest in the property.

The addend of 21 years was selected because that was the age of majority in most jurisdictions. Hence, any receiver of a future interest must be born within the lifetime of the measuring life.

The person being used as a measuring life must be alive when the future interest is created. A future interest is deemed to be created:

• when the deed creating the interest is delivered;
• when the testator of the will creating the interest dies;
• when the trust creating the interest becomes irrevocable, either at the moment of its creation, if it is an irrevocable trust, or when a revocable trust becomes irrevocable, usually at the grantor's death.

However, common law only applies the rule against certain interests:

• contingent remainders,
• powers of appointment,
• and vested remainders subject to executory interests.

Alternative contingent remainders are considered separately from contingent remainders: either or both may violate the rule, but the invalidation of either remainder does not necessarily invalidate the other.

These future interests are subject to the Perpetuities Rule because their vestment is uncertain until some time later, while the donor of the future interest knows his vested remainders if they are not subject to any conditions. This comports with the common law assumption that a donor knows best how to dispose of his property. Hence, dead hand control could extend beyond the perpetuities period if the vestment is noncontingent. Here, the Rule fails to limit dead hand control.

Under common law, if a future interest could vest outside the perpetuities period, no matter how unlikely, then it is null and void at the moment it was nominally created. Hence, to ensure that any future interest is valid, every possibility of the interest not vesting within the perpetuities period must be considered, no matter how unlikely the possibility. This has led to a great deal of litigation, and, naturally, more fees to lawyers and probate courts.

The vesting requirement of the RAP is always satisfied if the vestment is by possession. But a contingent remainder — but not an executory interest — can also vest as a property interest. When a contingent remainder vests, the remainderman receives absolute ownership of the property. However, a remainderman receiving property subject to an executory interest does not have absolute ownership of it since the property could be involuntary transferred to the holder of the executory interest if the contingency of the executory interest becomes true.

Whether a future interest is valid under the rule against perpetuities is determined by 2 methods:

1. The first approach is by considering whether the future interest must vest within the perpetuities period. If it must vest, then it is considered valid.
2. The second approach is to consider whether the interest may possibly vest after the perpetuities period. If there's any possibility, no matter how remote, then, under common law, the future interest violates the RAP, and, thus, is null and void.

Unlikely Scenarios

A good deal of case law has developed around unlikely — or even impossible — scenarios that could give rise to a violation of the rule against perpetuities. Some of the common scenarios considered possibilities include:

• The descendants of unborn people:
  • unborn widow, where a future interest may be created in the descendant of one's spouse.
    • Possible scenario: a future interest is given to a child of Adam's spouse. However, the couple becomes divorced or Adam's spouse dies. Adam subsequently marries a much younger woman, who was not alive when the testator died, who then has a child.
  • fertile octogenarian: the common law assumes that a person is fertile until death.
    • Some states have passed laws that stipulate that someone can be considered fertile until a certain age, or that extrinsic evidence can be used to establish infertility.
      • Possible scenario: a future interest is given to the first grandchild of Amy, who is 80 years old. Amy has 2 children, but after her husband died, she remarried and had another child. Because that child could give Amy her first grandchild, the Rule is violated because the interest could vest more than 21 years after Amy's death. The fact that virtually no woman is fertile at age 80 is not considered under common law.
• Stipulating that a future interest vests after a future event, which may happen after the perpetuities period, if it ever happens.
  • Slothful executor: a future interest that vests after the closing of the probate estate. Since there is no requirement that probate close within a certain time period, the future interest may violate the rule. In fact, some estates are never closed because the executor does not give a final accounting to the probate court, which is often done so that the final accounting does not become part of the public record.
• 21^st birthday requirement: common law holds that age 21 is reached on the day before the 21^st birthday since by then, the person has lived 21 years. Hence, a future interest vesting on someone's 21^st birthday may violate the Rule if 1 day more would violate the Rule.

Class Gifts

A class gift is a gift to a group, which is usually divided equally. The class can be open or closed. An open class can admit future members, while a closed class cannot admit any more members. For instance, a gift to A's children is open if A is alive and closed if A is dead.

To avoid violating the RAP, a class gift must close and vest to every class member within the period; otherwise, it is null and void. For instance, in Cook v. Horn, Cook created a revocable inter vivos trust granting his children income for life, and with the remainder going to his grandchildren. Because the trust only become irrevocable upon Cook's death, the future interests were only created at Cook's death, which closed the class of Cook's children. Hence, Cook's trust didn't violate the Rule, but had the trust been irrevocable when it was created during Cook's life, it would have violated the Rule since Cook could still have more children.

Sometimes the courts consider class gifts as gifts to subclasses, which are judged independently of the others. In American Security Trust Co. v Cramer, the testator made a gift of life income to his daughter Hanna, then upon her death, a life income to each of her children, with the remainder going to Hanna's grandchildren. However, only 2 of Hanna's children were alive when the testator died, with 2 more conceived afterward. The court ruled that the gifts to the 2 older children with the remainder going to their children did not violate the Perpetuities Rule, but that the gifts to the 2 younger children and their children did.

Another case where courts consider specific class gifts as subclasses is when the gift is specified — the gift itself does not depend on the number of class members. Hence, the class does not have to close to determine the gift. However, only specific gifts that must vest before the Perpetuities Period are valid.

Perpetuity Clause

For trusts located in states with rules against perpetuities, the trust document will usually have a perpetuity clause, whereby any trust assets that remain when the rule against perpetuities will be violated, notwithstanding anything in the trust document to the contrary, will be distributed to the beneficiaries.

Conclusion

Many other scenarios are possible, and there are special rules for powers of appointment. However, this ad hoc common law is starting to give way to more sensible rules that should reduce uncertainty and prevent some litigation. Although some states have abolished the Rule Against Perpetuities, the rationale for the abolishment is to attract trust business, but future interests still impede the alienation of property that is considered vital for the efficient allocation of economic resources.