Perpetuating the trust

  • Author : Marilyn McKeever
  • Date : May 2010
ABOUT THE AUTHOR: Marilyn McKeever TEP is Associate Director of Berwin Leighton Paisner LLP

T  he Perpetuities and Accumulations Act 2009 (the Act), which came into force on 6 April 2010, represents the first reform for nearly fifty years of this arcane, but important, area of the law. Section numbers below refer to sections of the Act, unless otherwise specified.

How we got here

The rule against perpetuities determines the validity of interests under a trust. It states that trust interests will be invalid unless they vest in interest within the perpetuity period. It does not determine the maximum length of the trust. So, for example, a life interest, which commences before the expiry of the perpetuity period (and so is vested) can continue after its expiry.

The common law rule against perpetuities was formulated in the seventeenth century. At common law, the perpetuity period ended 21 years after the death of the last relevant person who was living at the date of the instrument creating the trust. The relevant ‘lives in being’ were people associated with the trust, such as the settlor and the beneficiaries, but could include others named in the instrument: hence the common use of ‘royal lives clauses.’

Following the Perpetuities and Accumulations Act 1964 (the 1964 Act), settlors could select a fixed perpetuity period not exceeding 80 years.

The rule against excessive accumulations was imposed by statute: originally the Accumulations Act 1800 and most recently the 1964 Act. Income accumulation within a trust was restricted to one of six statutory periods, the most common being 21 years from the date of the settlement and the minority or respective minorities of beneficiaries being under the age of 18.

The new law

The Act introduces a single perpetuity period of 125 years, which applies irrespective of any perpetuity period specified in the trust instrument (section 5(1)).

Many trusts define a ‘trust period’, on the expiry of which a final distribution is made and the trust comes to an end. The trust period is a drafting construct, not a matter of law, and it remains possible to specify a shorter trust period.

The rule against excessive accumulations was abolished by section 13, so that income may now be accumulated throughout the perpetuity period. The trust instrument itself may place restrictions on accumulations.

Restrictions remain in place for charitable trusts. The trustees of a charitable trust may accumulate income for a period of 21 years only or during the life of the settlor or one of the settlors (section 14). This restriction was included for public policy reasons: charities should spend their income for charitable purposes, not retain it indefinitely.

The Act applies in relation to an instrument ‘taking effect’ on or after commencement day (section 15). It does not apply to a will executed before commencement day, even if the testator dies after commencement day. Nor does it apply to a special power of appointment exercised after commencement day, unless the instrument creating the power took effect after commencement day. The Act applies to new trusts and new wills made on or after 6 April 2010.

The perpetuity period, which applied to a trust creating a power of appointment, will also apply to the trusts created by an exercise of the power. The Act preserves the ‘wait and see’ rule (section 7). At common law, interests would be void if there were any possibility, however remote, that they would fail to vest within the perpetuity period. Under the 1964 Act, interests that in fact vested within the relevant period were valid, even if there was a possibility that they might vest outside it.

Existing trusts and wills

In general, the Act has no effect on existing trusts and wills, which continue to be governed by the 1964 regime.

Where an existing will or trust has a perpetuity period defined by reference to a life or lives in being and the trustees believe that it is ‘difficult or not reasonably practicable for them to ascertain whether the lives have ended and therefore whether the perpetuity period has ended’ they may, by deed, irrevocably elect for a perpetuity period of 100 years to apply (section 12).

Some wills or trusts specify that the perpetuity period is the shorter of a period of 80 years, or a period defined by reference to lives in being. Section 12 should apply to these provisions also.

Codicils

The Act does not apply to a will executed before commencement day (section 15(1)(a)), even though a will ‘takes effect’ at the testator’s death (section 20(6)). A reference to a will includes a reference to a codicil (section 20(7)).

What is the position if a will is executed before commencement day, but is republished by a codicil after commencement day? Republication is not the same as execution. While it might be sufficient that the codicil specifically refers to the perpetuities and accumulations provisions, the safer course, for clients who wish to take advantage of the Act, is for them to make a new will.

Pension schemes

The rule against perpetuities does not apply to interests under a ‘relevant pension scheme’ (section 2(4)). A ‘relevant pension scheme’ includes any occupational pension scheme, personal pension or public service pension as defined by section 1 of the Pension Schemes Act 1993. An occupational pension scheme does not have to be a registered pension scheme and includes an EFRBS. However, the rule will apply to trusts of the death benefits established by a nomination, or by the trustees of the scheme exercising a power of appointment in relation to the death benefits.

Section 6(3) provides that the perpetuity period applicable to a trust of death benefits under a pension scheme commences when the member concerned becomes a member of the scheme.

Death benefit trusts generally arise in one of two ways:

  • the trustees under most occupational schemes will have discretionary powers under the terms of the pension scheme to allocate the death benefit among the member’s beneficiaries, or
  • in the case of many personal pensions, the member may assign the policy or the death benefits so that the death benefits become held on discretionary trusts.
  • Where the member assigns the policy or death benefits, the ‘instrument’ creating the trusts will be the assignment or declaration of trust itself. So a trust of the death benefits created after commencement, or a policy taken out before commencement, will be subject to the new perpetuity and accumulation rules.

Where the discretionary death benefit trusts are written into the pension scheme itself, what is the ‘instrument’ creating the trusts? From one point of view, the relevant instrument is the pension scheme deed. However, a pension scheme is generally regarded as being a series of trusts and a new trust is created each time a member joins the scheme. There will generally be no ‘instrument’ when this happens, although section 19 could be interpreted as deeming the event to be an instrument creating the relevant trusts.

Where the pension scheme commenced and the member joined the scheme before commencement day, the old law applies and the perpetuity period applicable to a trust of death benefits is probably 21 years from the member’s death. Where the scheme commenced and the member joined the scheme after commencement day, the perpetuity and accumulation periods applicable to a death benefit trust will be 125 years from the date that the member joined the scheme.

What happens where the scheme commenced before commencement day, but the member joined afterwards? There are arguments that the new law applies in these circumstances, but the position is unclear and unless and until it is clarified, the safer approach must be to assume that the old law continues to apply.

Jurisdiction
Does the common law rule apply?
Is there a fixed period (as well as or instead of the common law period?)
Barbados
Yes
80 years (100 years if an ‘international trust’)
Bermuda
No (trusts created from 1 August 2009) 
Yes (trusts created before 1 August
Trusts created from 1 August 2009 may be of unlimited duration.
100 years (trusts created before 1 August 2009 only)
British Virgin Isles
Yes
100 years
Cayman Islands
No
150 years
Guernsey
No
Trusts may be of unlimited duration.

Until 2007 trusts could last a maximum of 100 years
Hong Kong
Yes
80 years (Reform proposed: fixed period of 150 years)
Republic of Ireland
No. Rule abolished with effect from 1 December 2009
Jersey
No
Trusts may be of unlimited duration.
Until 2006 trusts could last a maximum of 100 years
United States
Yes, though some states have abolished the rule.
Many states have adopted the Uniform Statutory Rule Against Perpetuities, which gives a fixed ‘wait and see’ period of 90 years. Interests actually vesting within the period are valid. Other states have longer ‘wait and see’ periods e.g. Florida: 360 years
Other jurisdictions

Most trust jurisdictions originally applied the common law ‘life or lives in being plus 21 years’ rule against perpetuities. The trend has been for the rule to be extended or abolished. The table above sets out the position in a number of major jurisdictions.

Finance Act 2006

In a classic case of the governmental right hand not knowing what the left hand was doing, the Finance Act 2006 effectively discouraged the creation of new trusts. It imposed inheritance tax charges on virtually all lifetime trusts on their creation and termination, and periodic charges during the life of the trust. An individual can establish certain tax favoured trusts by will, but even will trusts are unlikely to continue indefinitely, because of the 2006 inheritance tax changes. Settlors and testators are, accordingly, unlikely to take full advantage of the Act.

Conclusion

The reform of the rules against perpetuities and excessive accumulations is long overdue and the new rules provide welcome flexibility, despite the uncertainties in the areas of codicils and pension schemes. Unfortunately, following the Finance Act 2006, the making of any long term trust is fiscally unattractive. The removal of restrictions on income accumulation will be useful, particularly in trusts for young people and disabled trusts.


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