What Is the Rule against Perpetuities?
The Rule against Perpetuities (RAP) is a complex legal principle within Legal Concepts in Finance that prevents the indefinite control of property by prior generations. Its primary aim is to ensure that property rights are transferred into clear ownership within a reasonable timeframe, promoting the free alienability of real estate and other assets rather than allowing them to be tied up indefinitely by a "dead hand" controlling the future. The rule stipulates that an interest in property must "vest," or become certain, within 21 years after the death of someone alive when the interest was created, often expressed as "lives in being plus 21 years." This rule primarily affects future interest arrangements, such as those found in a trust or will. The Rule against Perpetuities attempts to strike a balance between an individual's desire to control their wealth beyond their lifetime and society's interest in marketable property.
History and Origin
The Rule against Perpetuities has its roots in English common law, emerging from judicial decisions in the late 17th century. Its origin is often traced back to the Duke of Norfolk's Case in 1682, which addressed attempts to create overly long-lasting conditions on property transfers.19 English courts sought to limit the ability of landowners to tie up property for generations, recognizing that such restrictions hindered commerce and efficient land use.18 The classic formulation of the rule, "No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest," was articulated in 1886 by American legal scholar John Chipman Gray. This principle was designed to prevent the "mortmain," or dead hand, from perpetually dictating the terms of property ownership.
Key Takeaways
- The Rule against Perpetuities (RAP) limits how long property can be tied up by a deceased owner's wishes.
- It generally requires a property interest to "vest" (become certain) no later than 21 years after the death of someone alive when the interest was created.
- RAP aims to prevent the "dead hand" control of assets and promote the free transferability of property.
- It primarily impacts future interests created through instruments like trusts and wills.
- Many jurisdictions have reformed or even abolished the common law Rule against Perpetuities due to its complexity and potential for unintended consequences.
Interpreting the Rule against Perpetuities
Interpreting the Rule against Perpetuities requires a careful analysis of the conditions under which a property interest will ultimately vesting or fail. The core of the rule lies in the certainty of vesting: at the moment the interest is created (e.g., when a will takes effect or a trust is established), it must be certain that the interest will vest or fail within the perpetuity period. If there is any theoretical possibility, no matter how remote or unlikely, that the interest could vest beyond the "lives in being plus 21 years" period, the interest is deemed void from its creation under the common law rule.16, 17 This prospective analysis, rather than a "wait-and-see" approach (which is a later statutory reform), has historically been a source of significant complexity. The "lives in being" refer to individuals who are identifiable and alive at the time the property interest is created, and whose lives are relevant to the vesting of the interest.15 The rule primarily applies to contingent interest and executory interests, which are not certain to take effect immediately.
Hypothetical Example
Consider an individual, Alice, who wishes to establish a trust for her descendants. She includes a provision in her will stating: "My property shall pass to my great-grandchildren who are alive when the last of my living grandchildren dies and who then attain the age of 25."
At Alice's death, assume she has two children, Bob and Carol, and three grandchildren, David, Emily, and Frank. All of these individuals are "lives in being" at the creation of the interest.
Under the common law Rule against Perpetuities, this gift to great-grandchildren might be problematic. It's possible that a great-grandchild could be born after the death of all of Alice's children (Bob and Carol) and all of her existing grandchildren (David, Emily, Frank). If this "after-born" great-grandchild's interest is contingent on reaching age 25, and all the "lives in being" (Alice's children and grandchildren) then die, this after-born great-grandchild might not turn 25 until more than 21 years after the death of the last "life in being." Because there's a possibility (however remote, considering all present lives), that the interest might vest too remotely, the common law Rule against Perpetuities would deem the entire gift void from the outset. This "all or nothing" approach, where even a slight theoretical chance of remote vesting invalidates the interest, highlights the rule's strictness.
Practical Applications
The Rule against Perpetuities has significant practical implications primarily in estate planning and succession planning, particularly when drafting wills and trusts designed to benefit multiple future generations. It aims to prevent individuals from creating perpetual control over their assets, ensuring that wealth eventually becomes freely transferable. For example, without such a rule, a property owner could potentially stipulate that their land could never be sold and must always pass down to the "eldest male heir," effectively removing it from the open market indefinitely.
Modern applications of the rule are most often encountered in long-term trusts, such as dynasty trust and certain complex charitable arrangements.14 The Uniform Statutory Rule Against Perpetuities (USRAP), adopted by many U.S. states, introduced a "wait-and-see" approach and often a fixed 90-year period, allowing interests that might violate the common law rule to be valid if they actually vest within that period.12, 13 This reform provides greater flexibility and reduces the likelihood of inadvertent violations. The Uniform Law Commission provides guidance on the Uniform Statutory Rule Against Perpetuities.11
Limitations and Criticisms
The Rule against Perpetuities has been widely criticized for its complexity, archaic nature, and potential to invalidate reasonable estate planning provisions based on highly improbable scenarios. Legal scholars and practitioners often find its application challenging and prone to error.9, 10 The rule's emphasis on theoretical possibilities rather than actual events (under common law) leads to what are known as the "fertile octogenarian" and "unborn widow" scenarios, where an interest is voided because of far-fetched hypothetical situations.7, 8
This notorious complexity has led to calls for reform or outright abolition in many jurisdictions.5, 6 Critics argue that the rule, in its original form, is a "booby trap for the unwary" and can easily ensnare even skilled drafters.4 Furthermore, modern legal tools, such as the ability to modify trusts by court order (cy pres doctrine) or with beneficiary consent, and the impact of federal transfer taxes, are seen by some as sufficient to address the policy concerns of promoting alienability without the need for the Rule against Perpetuities.2, 3 The academic article "The Embarrassing Rule Against Perpetuities" delves into these criticisms and the rule's notorious reputation among law students and practitioners.1
Rule against Perpetuities vs. Vesting
While closely related, the Rule against Perpetuities and Vesting are distinct concepts. Vesting refers to the point in time when an interest in property becomes fixed and certain, giving the holder a non-forfeitable right, even if possession is delayed. An interest can be vested in possession (immediate right to enjoy) or vested in interest (present right to future possession). The Rule against Perpetuities, on the other hand, is a limit on when a contingent future interest must vest. It doesn't define what vesting is, but rather dictates that if a contingent interest cannot be guaranteed to vest (or fail) within the "lives in being plus 21 years" period, then it is void from the start. Essentially, vesting describes the nature of the interest, while the Rule against Perpetuities sets the outer boundary for how long a contingent interest can remain uncertain before it must vest.
FAQs
What does "lives in being plus 21 years" mean?
"Lives in being" refers to individuals who are alive and ascertainable at the moment a property interest is created (e.g., when a will becomes effective). The "plus 21 years" is an additional period. The Rule against Perpetuities requires that a future interest must become certain (vest) within this timeframe—that is, no later than 21 years after the death of the last identifiable person alive when the interest was created. This period ensures that property control does not extend indefinitely.
Why is the Rule against Perpetuities important?
The Rule against Perpetuities is important because it prevents property from being tied up for excessively long periods by the wishes of deceased owners. Without it, assets could be kept out of commerce and control of living individuals indefinitely, hindering economic activity and potentially leading to disputes over property rights. It promotes the free transferability of wealth and assets.
Does the Rule against Perpetuities apply to all types of property?
The Rule against Perpetuities traditionally applied to both real property (like land and buildings) and personal property (like stocks and bonds). However, its most significant impact and historical development have been in relation to real estate. In modern estate planning, it primarily affects certain complex future interests created within trust agreements, especially those designed to last for many generations (e.g., dynasty trust).
Has the Rule against Perpetuities been abolished or modified in many places?
Yes, due to its historical complexity and the potential for unintended invalidations, many jurisdictions, particularly in the United States, have either significantly modified or outright abolished the common law Rule against Perpetuities. Reforms often include the adoption of a "wait-and-see" approach, where the validity of an interest is determined based on actual events rather than theoretical possibilities, or by establishing a fixed statutory perpetuity period, often 90 years or longer.