Rule Against Perpetuities
Take-Away: Perpetual trusts appear to be alive and well, which cannot be said for the Rule Against Perpetuities.
Background: A quick look around the country and one can quickly conclude that the ancient Rule Against Perpetuties (RAP)is rapidly losing its effect as a legal doctrine. States are now eager to jump on the bandwagon to either repeal their RAP, or adopt statutes that water down considerably the RAP’s legal effect. This evolution of the RAP can be summed up as a history lesson, starting 400 years ago.
The Duke of Norfolk’s Case: The RAP was created in 1681 as a ‘judicial response’ to deal with the confusion caused by the old English practice of holding title to real property in ‘fee tail,’ which made the real property inalienable by locking title into the family’s bloodline. It was difficult to ascertain however if title to real property was held in fee simple (i.e. freely transferable) or by fee tail (i.e. title could not be freely transferred outside the family bloodline.) Initially the English courts stepped in and allowed the current tenant of the fee tail property to convey their property in fee simple, in effect liberating the title to the real estate. In response, wealthy landowners then devised new future interests and conditions to title transfers, tying up title to land held by their family in ‘perpetuity’. This then led to the English courts to ultimately construct a rule that ultimately became known as the RAP as announced in The Duke of Norfolk’s Case.
Common Law: The most famous definition of the RAP that lasted for the next several hundred years was that of John Chipman Gray: No interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest. While this definition is succinct, the use of the word vest still left many questions, and even more mistakes when vesting could be delayed. The common law RAP was incredibly harsh; it voids any contingent future interest that might possibly vest beyond the perpetuities period. Consequently, this overly broad feature of the common law RAP created a trap- a long durational trust that held real property for longer than the RAP period was void from its inception.
20th Century: The 20th century triggered a RAP reform movement. Interesting to some (meaning the handful of lawyers who actually relish in the mind-twisting nuances of vesting under the RAP) is that the debate featured two prominent law professors who publicly battled over the decades with regard to how the RAP reform should be implemented. Professor Barton Leach led the movement that promoted the doctrine of the ‘wait-and-see’ RAP; rather than immediately subject each interest created in trust to the RAP, Professor Leach’s proposed reform would wait for a prescribed period of time and only then see if the interest had actually vested. Opposing this ‘wait-and-see’ RAP approach was Professor Lewis Simes who expressed the concern that all the ‘wait-and-see’ proposed reform would do would be to allow perpetuities to persist, which the law opposed.
USRAP: The American Law Institute’s Restatement (Second) of Property (Donative Transfers) in 1979 formally adopted the ‘wait-and-see’ RAP approach. This, in turn, resulted in the Uniform Law Commission’s proposed Uniform Statutory Rule Against Perpetuities (USRAP.) However, there was a slight but significant technical change. Rather than refer to ‘measuring lives’ or ‘lives in being’ the USRAP adopted a simple 90-year period. The key language of the USRAP is: “An interest that is it not certain to vest within the period of the common law rule is still valid if it actually vests within 90-years following the date it was created.” 25 states adopted the USRAP. Michigan adopted its version of the USRAP in 1988. [MCL 554.71-554.78.]
GST Reform: The same year that the USRAP was adopted, Congress introduced its revised generation skipping transfer tax. With an initial $1.0 million GST exemption, that sent a signal to the wealthy that a long-duration Trust could avoid both estate tax and the GST tax on at least $1.0 million. In effect, the GST exemption actually encouraged the adoption of dynasty-type trusts that Congress now apparently seeks to curtail with its recent legislative proposals. Banks were also wise to this GST exemption change and they perceived the opportunity to manage wealth for decades tied up in trusts. As the GST exemption increased over the years, so did the increasing pressure on state legislatures to repeal the RAP, and even the USRAP, to exploit the trust-business opportunity and the tax-savings associated with dynasty-type trusts. Michigan’s response to this trend was its adopted of the Personal Property Trust Perpetuities Act. [MCL 554.93.] It provides, in part: “Except as provided in subsection (3) an interest in, or power of appointment over, personal property held in trust is not invalidated by a rule against any of the following: (a) perpetuities.”
Restatement (Third) of Property (Donative Transfers): In 2010, the American Law Institute continued its work on reforming the RAP. It came up with yet a new version of the rule that replaces the 90-years ‘wait-and-see ‘ period with a requirement that the trust terminate at the death of all beneficiaries who are more than two generations younger than the settlor. This is viewed as something of a compromise in an attempt to honor the original purpose of the ancient RAP against remote vesting. So far, no state has moved to adopt this ‘reform’ of the RAP and it is unlikely to gain much traction.
Observation: The 20th Century RAP reform movement was ‘top-down’ led by law professors, Yet as of 2020, 34 states have now repealed the RAP, and none have reinstated it. This RAP repeal movement at the end of the 20th century and early into the 21st century has been a ‘bottom up’ approach led by banks that seek to attract trust business and wealthy families who wish to exploit the high federal estate and GST tax applicable exemption amounts.
Conclusion: The RAP is all about preventing ‘dead hand control’ that ties up real property in perpetuity. Yet the current trend across the nation is to either eliminate or drastically curtail the RAP in order to permit dynasty trusts to flourish. Congress’ enactment of the GST and that tax’s exemption provided the financial incentive for collective action by the banking industry. State legislatures that wanted to compete for trust business found it easy to listen to the banking industry and repeal the state’s RAP. It is an interesting history in the ‘rise and fall’ of the RAP.