The Rule Against Perpetuities: An Introduction
The Rule Against Perpetuities emerged more than a century ago in England as a means to keep ownership of property changing hands and prevent it from becoming "entailed," that is, held indefinitely within one family. At that time it was common for families to pass on their property to their heirs in perpetuity, meaning that the property would never be sold or conveyed outside of the family line. Therefore, property could come to be owned by only a single family member at any time and most probably would not pass out of the family for many generations.
One of the most important goals of the common law rule against perpetuities was to avoid holding property in limbo while the succession was determined or while a particular contingency occurred – an aim that remains as relevant today as in the past. The rule similarly prohibits property from being tied up indefinitely in a chain of excessive contingent interests, which, as a practical matter, limits the number of options a property owner has to dispose of its property as he or she pleases. In both cases, the rule limited the duration for which property could be held and made disposition on the part of the owner extremely difficult.
Accordingly , the rule against perpetuities prohibits the creation of future interests in property (e.g., future interests to take place only upon the occurrence of a certain event) if the interest may not be vested within certain time limits. If not vested within the prescribed time limits, the future interest is generally void. In this way, the rule also serves to protect property buyers, who may otherwise have difficulty in determining when a property may be transferred outright, as well as lenders, who would be unable to accurately assess the value of collateral interests. Furthermore, the rule provides some basic degree of certainty in determining when and under what conditions property may be transferred, given that future interests often become the subject of legal challenges.
It is interesting to note that the rule against perpetuities is not found in statute anywhere and has never been enacted by any state legislature. Rather, it is a product of customary practice that evolved into a common law rule over an extended period of time. It was later codified into the New York Estates, Powers & Trusts Law ("EPTL") and is based largely on the Uniform Statutory Rule Against Perpetuities.
What the Rule Actually Means, And Other Legal Terms
The Common Law Rule Against Perpetuities states that "no future interest is valid unless it must vest, if at all, within 21 years after some life in being."
At its core, the rule works with two key concepts: "lives in being" and "vested interests."
Lives in Being
The phrase "life in being" refers to a living person who has a connection to a future interest in an estate or trust. For example, if a future interest in an estate is given to the children of a specific individual, the lives in being would be the children and the grantor. After that, all other individuals who might have been granted the future interest must wait for their lives in being to expire within the 21-year time period.
Vested Interests
A vested interest means a current, certain right to an interest in the future. Put another way, it means an interest which is unconditionally guaranteed. If a vested interest is not certain or unconditional, it is said to be contingent.
The 21-Year Rule
To understand the 21-year rule, you must first comprehend how we measure "lives in being." A life in being is a person who is alive when the interest is created. To put it simply, the period of measurement begins when the future interest is created and then continues through the lives of those impacted until the future interest vests. The 21-year rule allows for a 21-year wait period in order for the future interest to vest. Thus, if a future interest is not certain to vest within 21 years after the creation beginning with the lives in being, the interest is void.
Let’s look at an example:
"A conveyance occurs from Grantor to Grantee as long as Grantee is alive and the moment he dies then to his widow, unless the widow is then married, then to R’s issue (i.e. his children), if any, then to Grantor."
In this example, there are three lives in being: 1) Grantee; 2) Grantee’s wife; and 3) Grantee’s children. If any of the lives in being (i.e., the three individuals named above) expire in a short period of time, it creates uncertainty for those who come after them. It creates uncertainty because the period of time before the future interest can vest is shortened. In the example, the interest would immediately vest in Grantee’s children if he is not married upon the moment of his death (even if he marries later on, the interest is treated as it was never there).
For Example: Assume that Grantee is married and has two children. The wife dies and Grantee remarries five years before he dies and has a third child. The interest vests immediately in the second wife, even though the interest can be passed on to the children if they survive.
The issue at hand is the question of how to determine the period of waiting imposed by the Rule. In the above example, the interest must vest within the life of Grantee plus 21 years. If the interest can vest before the end of the 21 years, then it is valid and does not run afoul of the Rule. Vested interests are assured.
How the Rule Works In Practice
The complexity of the rule against perpetuities affects the way it operates in legal scenarios. Indeed, there are instances where the common law rule and the statutory rules have both been applied simultaneously and where statutes have overruled the common law rule.
One of the most well-known examples is the case of Re: Peffers, in which a testator devised her bulk estate to her grandchildren. The testator’s will also included a clause providing for the creation of a trust whereby if her youngest grandchild reached 25 years of age, they would inherit one-third of the trust and, if her eldest grandchild reached this age, two-thirds of the trust. The petitioner sought to have the gift to the eldest grandchild upheld stating that the clause was valid and enforceable under the common law rule against perpetuities in that the interest would vest within 21 years of the death of the testator. The respondent, however, sought the declaratory relief that the clause was void and unenforceable, thereby invalidating the testator’s gift to the eldest grandchild. In this decision, the courts ultimately held that the doctrine of the common law rule against perpetuities applied to the above-referred clause, thus not only invalidating the gift, but also creating a resulting trust in favour of the testator’s residuary estate.
In another case, the court in Baker v Perkins 1989, which dealt with a situation where vested interests were contingent upon an event occurring within 21 years of the death of one of the beneficiaries, found that the principle of the common law rule against perpetuities did not apply because the contingency requirement had already been validly satisfied at the time of the testator’s death. In this instance, the court ruled that the interests became vested immediately upon the testator’s death.
Where there are joint-tenants, the statutory rule against perpetuities (created by s 11 of the Perpetuities and Accumulation Act 1968) will prevail. In the case of Glover v Hirschowitz 2001, the testator had set out in his will that upon the death of the survivor of his wife and himself, certain properties would be transferred into a testamentary trust ("the trust"), with income produced by the trust reverting back to the survivor. This clause imposed executory limitations, thereby constituting a joint-joint-tenancy. As all the above clauses were found to fall foul of the common law rule against perpetuities, the respondent sought to rely on the operation of section 11 of the said Act in order to save these clauses. The court ruled, however, that the common law rule took precedence in this regard. It was held further that an inter vivos disposition cannot be saved by the operation of the statutory rule where there are joint tenants, since the said statutory provision expressly only applies to the "interest" of a "survivor" in a "joint estate".
In the case of Morton v Morton 2005, the testator left a legacy of his secret profits ("the gift") to his nephew who was not a beneficiary of the testator’s residue. The executrix eschewed the gift on the grounds that the legacy was to be distributed in a way that fell foul of the rule against perpetuities. The court held, however, that the said legacy is valid in terms of section 4A(1)(b) of the Wills Act 1965, which provides that the said provisions do not apply to gifts to a beneficiary of the residue and not subject to payment or repayment to the estate.
As the rule against perpetuities seeks to limit the uncertainty created by the repeated succession of rights over a single property or right, its practical application is, therefore, to find a simple solution to a common law problem.
When And Where The Rule Has Exceptions
Exception and modifications to the rule against perpetuities have evolved over time through statutory enactments. Most notably, the US Uniform Statutory Rule Against Perpetuities (Uniform Act) and other similar enactments that modify the common law rule and allow interests to vest up to 90 years after the creation of the interest. The Uniform Act is based on the drafting committee’s conclusion that the administrative aspect of the common law rule was "too complex, too difficult, and too uncertain, and after much study we found several enactments which serve to relieve us of these difficulties and allow for longer times in which to vest."
The sections of the Uniform Act that are sections 205 and 207 address the duration of vesting and life in being periods for trusts and other instruments. Many states have adopted all or part of the Uniform Act, with many states enacting a modified version that allows for a 90-year vesting period rather than a 21-year period. The Uniform Act section promulgated by the American Law Institute in 1957 was endorsed and adopted by both the American Bar Association and the National Conference of Commissioners on Uniform State Laws. While it has been widely adopted, the Uniform Act has yet to be adopted by all states. Thus, the adoption of the Uniform Act depends on the state where the interest is created.
Implications for Estate Planning and Trusts
The common law rule against perpetuities has an indelible impact on estate planning. Attorneys who draft wills and trusts carefully consider how to create provisions that conform to the rule. They also express the rule against perpetuities (or a variation of it) in specific statutory language when writing in states that have enacted statutes based on the Uniform Statutory Rule Against Perpetuities.
By doing this, estate planning attorneys help clients avoid pitfalls that might render provisions ineffective, such as, for example, a clause that attempts to control property purportedly years into the future . Instead of being subject to attack based on the rule against perpetuities, an attorney will express a client’s intent by relying on a statutory authority that arguably provides some relief in terms of contingent interests, or by limiting vesting to a 21-year period after the death of a named person, where permitted by statute, so that the estate planning document complies with the principles behind the common law rule against perpetuities.
Controversy and Criticism Surrounding The Rule
The rule appears to have been originally formulated as a means of determining whether a future interest (such as a "say, in a deed to my son John"), which may or may not occur, is of sufficiently remote or uncertain character as to justify its present exclusion from a present conveyance of property to one or more persons in being. As a test or rule of invalidity, however, it has been by various courts extended so that it is not always actually applied to a future interest per se, but rather to a future interest as it may operate in a particular context or set of circumstances. A criticism of the perpetuity rule is that, while it may be possible to determine all the facts pertaining to the interests involved in a particular transaction, it is often impossible or impracticable to anticipate all contingencies which might arise at some indefinite time in the future, and thus to ascertain whether the designated interests are invalid. A judge faced with such a matter must often decide whether to devote a great deal of time to what usually turns out to be a scarcity of possibilities. The peril of being almost invariably wrong at the time of making the decision, because of the impossibility of anticipating circumstances too remote, has caused courts to apply the rule against perpetuities reluctantly. Contrary to the foregoing comments is the declaration expressed by some courts that the rule is so definite in its application that it does not permit its subjection to uninformed anticipation. In some states, because of the fact that the statutory enactments made by those states with respect to the rule against perpetuities merely follow the common law (see Statutory Change Affecting the Rule Against Perpetuities; Rule Against Perpetuities in Delaware), it has been stated that courts will not be free to abolish the rule, because such action would be a disruption of the legislative policy of the state. There is, however, the view that the common law rule against perpetuities has evolved from its original purpose and now functions primarily to control the affairs of the living and to prevent restraint upon alienation. According to this view, however important the perpetuity rule is as a mechanism to avoid the future uncertainty of interests, the rule should not be extended to diminish the functional value of present property rights. The few states, and the District of Columbia, which have completely abolished the rule against perpetuities, have adopted a common sense approach which permits the allocation of property rights not only to the "living" but also to the unborn.
Final Thoughts on The Rule and Its Future
With this in mind, our conclusion is that whilst the common law rule is not yet universally accepted, following the recent Queensland decision of Bjorkland v Queensland Land and Resources Tribunal (No 3) [2013] QCA 351, a trend seems to be emerging in favour of the abolition of the rule. While additional legislation may still be required in Queensland to completely abolish the rule, it is likely that New South Wales will follow a similar approach as had been implemented in Queensland.
While it may be too early to tell what the future will hold for the common law rule against perpetuities, our expectation is that it will eventually be completely abolished in favour of statutory reform of the rule. The only jurisdiction in Australia that currently has a statutory scheme for the rule against perpetuities is Queensland , however, most of the other states are beginning to see reform of the rule and there may be further movement away from the rule in the future. As the states come to grips with the inconsistencies that exist with the common law rule, it will only be a matter of time before legislative changes will occur and force the rule to reshape itself to keep pace with modern developments. In the recent Queensland case, Justice Jackson made comments to the court regarding the complexities and inconsistencies that exist with the common law rule and suggested that the only solution may be to enact a statutory scheme. Whether or not the common law rule evolves on its own volition or through legislative intervention, it is clear that the reform of the rule is long overdue and should be dealt with in a uniform and consistent manner.