Equity: Perpetuity

The Perpetuity Rule

The Rules

The perpetuity rule guards against trusts which are too long. It consists of three sub-rules:

  • The rule against remoteness of vesting
  • The rule against inalienability of capital
  • The rule against excessive income accumulation
The Rule Against Remoteness of Vesting

This rule applies to ‘contingent gifts’: gifts where a beneficiary does not immediately acquire an interest and there is no guarantee that they ever will.

For example, take a gift ‘for John if he becomes a solicitor before the age of 35’. This is a contingent gift because it is a dependent on John becoming a solicitor before 35, which might never happen. Another example is a gift to ‘my 10-year-old daughter Jane, to vest in any of her children who reach the age of 18’. The gift to Jane’s children is a contingent gift, because it is contingent on a) Jane having children and b) any of them reaching 18.

The beneficiary of a contingent gift does not have a ‘vested’ interest in the trust until they fulfil the contingencies. Under the rule against remoteness of vesting, a contingent gift is void unless the contingent beneficiary will necessarily gain a vested interest before the end of the perpetuity period.

If the statutory rules for calculating the perpetuity period apply, the trustees are entitled to ‘wait and see’. In that case, the gift is valid and exerciseable until it becomes apparent that the beneficiary will not be able to fulfil the contingency in time.

The Rule Against Inalienability of Capital

A trust is void if it makes capital inalienable (non-disposable) for longer than the perpetuity period. It must in principle be possible for the beneficiaries to dissolve the trust and take its assets under the rule in Saunders v Vautier [1841] EWHC J82 at some point before the trust ends.

This rule does not apply to otherwise valid charitable purpose trusts: Re Tyler [1891] 3 Ch 252.

The Rule Against Excessive Income Accumulation

Accumulation is the process of adding capital to the trust fund, ‘increasing the estate in favour of those entitled to the capital and against the interests of those entitled to income’: Re the Earl of Berkeley [1968] Ch 744. The rules depend on the trust’s nature and creation date:

Charitable Trusts

For charitable purpose trusts, there is a statutory maximum accumulation period of 21 years from the day the trust allows the trustees to start accumulating: Perpetuities and Accumulation Act 2009, s.14. If this period is exceeded, the power to accumulate is terminated, but the trust is not void. An accumulation power which lasts more than 21 years can survive if it is specified to end with the death of a specified settlor(s): s.14(5).

Non-Charitable Trusts After 6 April 2010

There is no limit on accumulations for non-charitable trusts created after 6 April 2010: Perpetuities and Accumulation Act 2009, s.13.

Non-Charitable Trusts Before 6 April 2010

For non-charitable trusts created before 6 April 2010, no trust can be exercised to accumulate income for longer than: the settlor’s lifetime; 21 years from the settlor’s death; the minorities of any beneficiaries with a present interest in the income turn 18; 21 years from the disposition date; the minorities of any person in being when the settlor dies; or the minority of any person in being at the disposition date. Law of Property Act 1925, s.164.

The Perpetuity Period

There are three different rules for determining the perpetuity period applicable to modern trusts.

The Common Law Rule

The perpetuity period at common law is 21 years after the death of the of the last surviving, relevant ‘life in being’ alive at the time the gift takes effect. If there are no such people (such as where the trust is to maintain animals), the period is 21 years. The common law rules apply unless one of the statutory rules apply.

A life in being is a born human or foetus in its mother’s womb at the date the gift is made: Cadell v Palmer (1833) 1 Cl & F 372.

The gift takes effect when the trust is created, in the case of an inter vivos trust. For testamentary gifts, this is when the settlor dies.

The trust instrument will normally specify the relevant people who count as the lives in being (the ‘measuring lives’). It is common to use the Royal Family, for example. If the trust does not define the measuring lives, the common law is not clear.

The Wide View

On the wide view, the measuring life is anyone causally connected to the gift (such as by being mentioned in the trust).

The Narrow View

On the narrow view, a measuring life is anyone who is both causally connected to the gift and makes the gift valid.

If it is ‘difficult or not reasonably practicable’ to tell if the measuring lives have ended, the trustees can declare this in a deed. This will replace the common law period with a fixed period of 100 years from the date the gift took effect: Perpetuities and Accumulations Act 2009, s.12.

The Perpetuties and Accumulation Act 1964

The rules of the Perpetuities and Accumulations Act 1964 apply to the following kinds of gift, but only if they specify in the instrument that the 1964 Act applies:

  • Lifetime trusts that took effect between 16 July 1964 and 5 April 2010.
  • Testamentary trusts that took effect on or after 16 July 1964 and were executed before 6 April 2010.
  • General powers of appointment that took effect between 16 July 1964 and 5 April 2010.
  • Special powers of appointment, if the relevant instrument took effect between 16 July 1964 and 5 April 2010.

The perpetuity period under the 1964 Act is 80 years.

The Perpetuties and Accumulation Act 2009

The rules of the Perpetuities and Accumulation Act 2009 apply to:

  • Lifetime trusts that took effect on or after 6 April 2010.
  • Testamentary trusts that took effect on or after 6 April 2010.
  • General powers of appointment that took effect on or after 6 April 2010.
  • Special powers of appointment, if the relevant instrument took effect on or after 6 April 2010.

The perpetuity period under the 2009 Act is 125 years: s.5(1).

Exceptions

Some trusts are exempt from the need to comply with the rule against perpetuities:

Trusts with no Future Interests

If all the beneficiaries are absolutely entitled to take the trust property subject to no conditions, the trust does not need to comply with perpetuities. These are normally bare trusts.

Trusts where One Individual Controls all Assets

Where the settlor has the power to revoke the trust, or another person can end the trust at any time using a general power of appointment during their lifetime, the perpetuity rules do not apply. There must only be one beneficiary.

Failed Trusts

Where a trust fails and the property is then held on resulting trust, the perpetuity rules do not apply. There is an exception to this where the resulting trust arises due to the termination of a determinable interest that took effect after 16 July 1964.

Pension Schemes

Most kinds of pension scheme are exempt from the perpetuity rules. Special rules apply to powers of advancement under pension schemes: Perpetuities and Accumulations Act 2009, s.2(5).