T he Perpetuities and Accumulations Act 2009 (the 2009
Act) came into force on 6 April 2010. The 2009 Act makes
substantial alterations to the law of perpetuities and excessive
accumulations. However, in the main those changes are prospective
only. It will therefore be necessary for practitioners to
understand not only the new regime but also the pre-existing law.
This article will therefore consider the evolution of the law
relating to perpetuities and accumulations, including the changes
which have been made by the 2009 Act and the extent to which the
old law is still applicable. The article will also consider the
practical effects of the 2009 Act, in particular with relation to
the drafting of wills and trusts.
A brief summary of the effects of the 2009
Act
The main effects of the 2009 Act are:
- For settlements made and wills executed on or after 6 April
2010 the perpetuity period will be 125 years and no other
period.1
- The rule against perpetuities is effectively abolished except
insofar as it affects interests which arise under private trusts.
It will not therefore apply to easements, options or rights of
pre-emption or other commercial arrangements.
- The existing exclusions from the rule against perpetuities for
pension schemes are extended.
- An accumulation period in a private trust may extend for the
whole of the perpetuity period and is not limited to 21 years.
- Charitable trusts may accumulate income for 21 years or for the
life of the settlor.
- Where an existing settlement has a perpetuity period which is
governed by a life (or lives) in being then the trustees will have
a (fiduciary) power to adopt a perpetuity period of 100 (not 125)
years but only where it is ‘difficult or not reasonably
practicable’ to ascertain whether the lives have ended.2
The old law
Pre-1964 law
Perpetuities
The position prior to the coming into force of the
Perpetuities and Accumulations Act 1964 (‘the 1964 Act’)
on 16 July 1964 is governed by the common law rule against
perpetuities. The classic statement
of the rule is found in Gray on The Rule Against
Perpetuities:
‘No interest is valid unless it must vest, if it
vests at all within the period of a life in being at the date of
the gift, plus 21 years.’5
Any lives could be selected to be the basis of the perpetuity
period. There was no need for the lives to be connected with the
settlement as long as they were reasonably
ascertainable. Lives could not be
selected under the common law if it was impractical to ascertain
those lives. This was considered closely in Re
Villar. T died on 6 September
1926, leaving a Will made in 1921 and confirmed in a codicil made
in 1926. He left funds on trust with a perpetuity period extending
20 years from the day of the death of the last survivor of all the
lineal descendants of Her late Majesty Queen Victoria ‘who
shall be living at the date of my death’. There was evidence
from Portcullis Pursuivant at Arms stating that on 6 September 1926
there were about 120 descendants of Queen Victoria in many of the
countries of Europe. It was not at all clear whether the children
of Tsaritsa Alexandra of Russia were living. The trust was held to
be valid as ascertaining the specified period was merely expensive,
not impracticable.
An interest is void under the rule against perpetuities if at
the date of the instrument it is possible that it might not vest
within a life in being plus 21 years, even if it does vest
within that period. The common law rules
were developed by the Court to prevent the ownership of property
(particularly land) being tied up for too long a period – the
so-called ‘Dead Hand Rationale’.
It was argued in favour of the common law rule that it promoted
certainty by deciding at the time a gift was made that it was
immediately invalid. However as Maudsley
explains in The Modern Law of Perpetuities the common law rule
did not establish such certainty because it permitted contingent
gifts where the contingency was specified to occur or not within
the perpetuity period. It was unclear until the contingency
occurred or the period for its occurrence ended whether the
contingent gift would take effect. To that limited extent the
pre-1964 law included a ‘Wait and See’ principle.
The pre-1964 law not only caused an interest which might vest
outside the perpetuity period to be void but also all ulterior
gifts to be void.
The pre-1964 rules were problematic and caused injustice. Very
many gifts failed because they were specified to be for such of the
children of a living person as should attain an age greater than 25
years. Under s 163 Law of Property Act 1925 an age
specified to be greater than 25 years will be read as if it stated
21 years and was therefore valid. In respect of
class gifts, each member of the class had to obtain a vested
interest within the perpetuity period in order for the gift to be
valid. Furthermore gifts to A for life, then to A’s widow for life
and in remainder for A’s children as should be living at the death
of A and A’s widow were invalid in respect of the gift to the
children because they might vest only on the death of A’s widow and
A’s widow might not be a life in being at the date of the
gift.
The common law rule against perpetuities was held to affect
interests other than those under trusts. For example in
Dunn v Blackdown it was held
to apply to easements. Similarly the common law rule against
perpetuities applies to options where the time for exercise is in
the future.
Accumulations
At common law the period for which it was permissible to
accumulate income in a trust was the perpetuity
period. The rule against
excessive accumulations is entirely statutory and was introduced by
the Accumulations Act 1800. The 1800 Act was a political
overreaction to Thellusson v Woodford
(‘Thellusson’s Case’). In that case
the previously stated common law rule that the accumulations could
be made throughout the whole of the perpetuity period was
confirmed.
Peter Thellusson, a well-known Swiss banker of the time, left a
Will made in 1796. After having made provision for his family,
Thellusson left his residuary estate (some GBP600,000 – a very
substantial amount of money for the time) to be held on trust to
accumulate income during the lives of all his sons, grandsons and
great-grandsons living at the date of his death. On the death of
the last survivor the fund was directed to be split equally between
the three eldest living male issue of his sons and if there were
none to the Crown. The Will was challenged by Thellusson’s children
and widow.
Lord Eldon could not find any economic justification for
limiting accumulations made within the perpetuity
period. However there was
significant contemporary criticism of the
direction to accumulate included in the trust of residue and
concern that too much wealth and therefore power could be
accumulated in one hand and that this could endanger the economy of
the whole country. Perhaps partly in
view of the fact that Thellusson was foreign, Parliament (of which
Thellusson’s three sons were members) introduced
the 1800 Act to prevent accumulations throughout the perpetuity
period. The provisions of the 1800 Act were that a person wishing
to permit or direct accumulations must specify one (and only one)
of the periods for accumulation permitted by the 1800 Act. The
provisions of that Act are substantially reproduced by s 164
Law of Property Act 1925. The accumulation periods
permitted are:
- the life of the grantor or settlor
- a term of 21 years from the death of the grantor, settlor or
testator
- the duration of the minority (or respective minorities) of any
person living or en ventre sa mère at the death of the grantor,
settlor testator, or
- the duration of the minority (or respective minorities) of any
person who under the limitation of the trust or will if of full age
would be entitled to the income directed to be accumulated.
The Perpetuities and Accumulations Act
1964
Perpetuities
The 1964 Act permitted the settlor or testator to select a
period not exceeding 80 years to be the perpetuity
period for a trust. It was therefore no longer necessary to rely on
a perpetuity period based on a life in being at the time when the
trust came into effect. However it was still possible to use a life
in being as the basis of a perpetuity period, for example, a royal
lives clause; and if no perpetuity period was specified in the
interest then under the common law principles the lives in being
would be those referred to in the trust or will itself. Section
3(4)(a) excluded any class of specified lives whose inclusion as
the basis of the perpetuity period would make it ‘impracticable’ to
ascertain the date of death of the survivor.
It should be noted that a specified perpetuity period up to 80
years is applicable only to gifts which are valid under the common
law rule against perpetuities. (The gift must vest within the
specified perpetuity period; if the gift might not vest within the
perpetuity period specified that perpetuity period is no longer
relevant). Gifts which might not vest within the specified
perpetuity period and therefore would otherwise be void may be
saved by the ‘Wait and See’ provisions. The ‘Wait and See’
provisions are governed by an independent perpetuity period which
must be based on a life in being plus 21 years, rather than the
specified perpetuity period. However not all lives can be lives in
being for the purpose of the ‘Wait and See’ provisions. There is a
statutory list of lives specified for the purpose of those
provisions.
Where gifts are void under the common law rule against
perpetuities, s 3(1) allows persons interested in the trust to
‘Wait and See’ whether the interests vest during the perpetuity
period. If it becomes apparent that an interest will not vest
during the perpetuity period this will not affect the validity of
anything previously done in relation to that interest (i.e. by way
of advancement, application of intermediate income or
otherwise). Under s 4 gifts which
would have been void by contagion as ulterior to gifts void for
remoteness under the common law rule against perpetuities are
accelerated on the failure of a prior gift.
The effect of the 1964 Act in relation to gifts to the children
of a person attaining an age greater than 25 years does less
violence to the original provisions of the settlement or will than
that done by s 163 Law of Property Act 1925. It is only if
the gift fails to vest in the perpetuity period that the vesting
age will be read down to 21.
In respect of class gifts, if the ‘Wait and See’ rules and the
age reduction rules do not save the gift then it may be saved under
ss 4(3) and 4(4) of the 1964 Act. The gift will be valid in respect
of those members of the class who do obtain a vested interest
within the perpetuity period and void only in respect of those who
do not obtain such a vested interest. Under s 4(5) it is
permissible to apply intermediate income to the contingent members
of the class. It is important to remember that some people who
might at first glance be able to take under a class gift will not
in fact be able to attain an interest because the class has already
closed under the general class-closing rules.
In respect of the unborn widow(er) problem seen in Re Frost s 5
provides a solution, namely that at the end of the perpetuity
period the disposition shall be treated (if in so doing the gift
will be saved) as if it had been limited to vest at the end of the
perpetuity period. A simple ‘Wait and See’ solution would only have
permitted to take those who had attained a vested interest at the
end of the perpetuity period. However s 5 causes the trust or will
to be read as if the gift had been said to vest within the
perpetuity period.
Accumulations
Section 13 of the 1964 Act amended s 164 Law of Property Act
1925 to include two further periods which could be specified for
accumulations namely:
- 21 years from the making of the disposition, and
- the minority (or respective minorities) of any person in being
at the date of the disposition.
The 2009 Act
Perpetuities
The 2009 Act will apply in relation to settlements made and
wills executed on or after 6 April 2010. Therefore wills which
were drafted prior to 6 April 2010 will not be affected by the new
rules. The 2009 Act will apply to an instrument made in exercise of
a special power of appointment only if the instrument creating the
power took effect after that date. Section 1
states when the rule will apply:
- Interests under a trust creating successive estates or
interests.29
For example, where A leaves his residuary estate on trust for
his widow B for life and thereafter for such of his children C, D
and E as attain the age of 30 and if more than one in equal shares,
the rule applies to the interests of C, D and E.
Rights of reverter on determination of a determinable fee simple
and rights arising under a resulting trust on the determination of
a pre-existing determinable interest.
For example, where A leaves a property in fee simple to his
daughter B until she should bear a son, the rule applies. Under s
10 if the daughter is living at the end of the perpetuity period
(125 years) and has not borne a son her interest becomes
absolute.
- Interests under a trust which are subject to a condition
precedent.31
For example, if A leaves property on trust for his son B if he
should run a mile in less than four minutes, the rule applies to
B’s interest. If B fails to run a mile in under four minutes in the
125-year period his interest will be void for remoteness.
Interests under a trust which are subject to a condition
subsequent where:
- any right of re-entry is exercisable if the condition is
broken32, or
- any right equivalent to re-entry is exercisable in respect of
property other than land if the condition is broken.33
For example, if A leaves property on trust for his grandsons
provided that none of them obtains a degree from the University of
Hull before the age of 60, but if one of his grandsons does so the
property shall pass to charity B. The rule against perpetuities
affects the grandson’s interest and B’s interest so that if none of
A’s grandchildren breaches the condition in the following 125 years
B’s interest will be void for remoteness.
- Successive interests in personal property created by will under
the doctrine of executory bequests.
Since 1925 successive interests in land can only be created
under a trust. It is not possible to create successive legal
interests in land. There is no corresponding prohibition on
successive legal interests in chattels under the doctrine of
executory bequests. The common law rule against perpetuities
applied to such legal interests and continues
to do so under the 2009 Act.
Section 2 specifies exceptions to the rule against
perpetuities.
- A gift over from one charity to another.37
- An interest or right arising under a relevant pension
scheme.38
Clearly the most important application of the rule against
perpetuities will continue to be in relation to successive gifts
made in an inter vivos settlement or will and powers of
appointment contained within them. It will no longer apply to
commercial interests such as options or easements so long as a
trust is not used. Gifts over from one charity to another are
exempt, as are relevant pension schemes. These include schemes
which are not approved schemes and therefore the availability of
tax relief is not a criterion for whether a scheme will benefit
from the relaxation of the rule against perpetuities. Under s 3 the
Lord Chancellor is given the power to provide that the rule against
perpetuities is not to apply in cases of a specific description or
if specified conditions are satisfied. Under s 4 certain exceptions
are abolished.
A perpetuity period of 125 years and no other is created by s 5.
It is therefore no longer possible to specify a life in being as
the basis of a perpetuity period and therefore it is no longer
possible to draft a royal lives clause. The period will apply
whether or not it is specified. The perpetuity period begins when
the settlement, will or other instrument takes
effect. If a special power of
appointment is exercised the perpetuity period will run from the
date of the instrument which creates the power (rather than from
the date it is exercised). The foregoing applies
unless the instrument or exercise of a power is in relation to a
relevant pension scheme which nominates benefits or exercises a
power of advancement. In that case the perpetuity period runs from
the date when the person concerned became a member of the
scheme.
The ‘Wait and See’ rule is preserved by s 7 so that interests
are treated as being valid until it is shown that they cannot vest
within the perpetuity period and actions taken in the meantime on
that basis are valid. Section 8 excludes members of a class to
avoid remoteness (as under s 4 Perpetuities and Accumulations
Act 1964). As under s 6 of the 1964 Act, s 9 of the 2009 Act
causes the acceleration of any gift ulterior to and dependant on an
interest which is void for remoteness. As a lives-in-being
perpetuity period is no longer permissible the 2009 Act does not
reproduce the age-reducing rules in s 4 of the 1964 Act as these
are no longer necessary.
Under s 10(1) if a determinable fee simple has not determined
within the perpetuity period the fee simple becomes absolute. Under
s 10(2) if a determinable interest in property (other than land)
has not determined within the perpetuity period so as to give rise
to a resulting trust the determinable interest becomes absolute at
the end of the period.
In general the 2009 Act is prospective but in one important
respect it is retrospective. Section 12 gives trustees of existing
trusts the power to adopt by deed a perpetuity period of 100 years
(and no other period) if the existing perpetuity period is based on
a specified life or lives in being if:
‘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’.
43
The above power is fiduciary and must be exercised in the
interests of the beneficiaries of the trust. Any exercise of the
power is irrevocable. The power could be useful, for example, where
there is a royal lives clause and the issue have all died apart
from one and it is not known if that one is living or not. For
example, there used to be difficulties in the past where the royal
lives clause specified the descendants of Queen Victoria, one of
whom was Princess Anastasia as seen in Re Villar.
It is important to note that the power will not aid trustees if
they know that a life in being has died but are unable to ascertain
when; or if the trustees are aware that at least one of the
specified persons is still living or died less than 21 years ago.
Furthermore s 12 does not apply where if it would be difficult to
trace lives for the purposes of the ‘Wait and See’ provisions of
the Perpetuities and Accumulations Act 1964.
The duration of non-charitable purpose trusts are unaffected by
the 2009 Act. There are various
genuine exceptions to the principle that private trusts must have
beneficiaries. Trusts have been upheld for the following
purposes:
- The erection and maintenance of tombs.45
- The maintenance of specific animals.46
- The promotion of foxhunting47 (although presumably such a trust
would now be void as promoting an illegal purpose following the
Hunting Act 2004).
- The saying of private masses.48
- These trusts, which have been described as ‘troublesome,
anomalous and aberrant’49 have a perpetuity period which continues
to be limited to a life or lives in being plus 21 years. Most are
only for 21 years as there is usually no relevant life in being. It
is not thought that the relevant life in being can be that of the
animal.50
Accumulations
The various restrictions on accumulations referred to above in
the Law of Property Act 1925 and s 13 Perpetuities and
Accumulations Act 1964 will cease to have effect in relation
to settlements made on or after 6 April 2010 so that the common law
as declared by Thellusson’s Case is re-established by s 13
of the 2009 Act. Section 14 creates a restriction on accumulations
in respect of charitable trusts. Such charitable trusts may only
accumulate income for 21 years from the date the trustees had the
power to or were directed to accumulate income or for the life of
the settlor or settlors. The restriction on
accumulations does not apply if the Court or the Charity Commission
provide for a different period of accumulation.
Practical effects of the 2009 Act
For drafting purposes it will no longer be necessary to specify
a perpetuity period for new settlements. Any attempt to specify a
period other than 125 years will be ineffective. Trusts should
however still include a trust period of 125 years or less in which
all interests should vest and after which no powers may be
exercisable.
It will be possible to include a power or a duty to accumulate
income throughout the 125-year perpetuity period (unless the trust
is charitable); however, the settlor or testator should consider
whether or not such a provision is desirable. When drafting a
disabled person’s interest trust, an extended accumulation period
for the life of the disabled person is likely to be desirable.
As wills are only affected by the 2009 Act if they are
executed on or after 6 April 2010 testators whose wishes
could be better served with longer perpetuity or accumulation
periods should alter their wills. This could be done by
republishing the will using a codicil to change the material
provisions.
Trustees of trusts which have a perpetuity period governed by a
life in being which is difficult to ascertain should consider
whether they have power to elect for the 100-year period. If they
do they can exercise the power by deed. If the decision to exercise
the power is momentous the trustees may wish to protect themselves
by asking the Court to bless their decision in advance under Part
64 Civil Procedure Rules.
Where there is a trust which can be varied under the
Variation of Trusts Act 1958 it may be possible to vary it
to include a fresh perpetuity period of 125 years following Re
Holt. This would have the
potentially beneficial consequence of extending the life of the
trust and postponing exit charges to inheritance tax (IHT) and
charges to capital gains tax (CGT) under s 71 Taxation of
Chargeable Gains Act 1992.
Conclusion
The 2009 Act is clearly a welcome simplification to the rules
regarding perpetuities and accumulations. The 125-year period is
reasonably long and is preferable to the use of a life or lives in
being clause because such a clause may cause it to be expensive or
difficult to ascertain when the period has ended. Therefore the
ability for trustees to ‘opt-in’ to the 100-year period in existing
trusts is also a useful power. The rule against excessive
accumulations has been economically unjustifiable for over 200
years and its removal and re-establishment of the common law under
Thellusson’s Case is an improvement. Nevertheless as the
2009 Act is largely prospective and there are still trusts which
will fall to be dealt with under the pre-1964 rules, practitioners
will have to struggle with three complex regimes dealing with
perpetuities and accumulations for some time to come.
Ruth Hughes is a Barrister at 5 Stone Buildings, Lincoln’s Inn,
London.
Endnotes