Perpetuities & Accumulations Bill – Update

 In Trusts, Wills

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The Bill has now been heard by the House of Lords and has passed to the House of Commons which will not now be able to consider it further until after 12 October 2009.

Introduction

The Bill has not taken the opportunity to consolidate the law in this area and so the outcome if it proceeds as drawn is that we will have three separate sets of rules applying to perpetuities and accumulations, as Lord Hodgson pointed out in the debate:

  • Legislation applying pre 1964
  • Legislation applying between 1964 and 2009 (or whenever this Bill comes into force) and
  • This legislation applying from commencement

To which one might add the common law rule!

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Rule against Perpetuities

The existing exceptions to the application of the rule against perpetuities are replicated in the Bill. The rule does not therefore apply to charities and relevant pension schemes (s.2). The rule will apply to any resulting interests or rights arising under an instrument nominating pension scheme benefits or from exercising a power of advancement arising under a pension scheme – s.2(5).

The new rule will apply to the following interests set out in s.1:

  • Trusts creating successive estates or interests e.g. Adam for life and then to Barbara for life and then to Charles absolutely. The rule will apply to each of those interests.
  • Trusts where the estate or interest is subject to a condition precedent.
  • Trusts where the estate or interest is subject to a condition subsequent – which if broken provides a right which is exercisable in favour of another; the rule applies to that right
  • Successive interests under the doctrine of executory bequests – i.e. where a testator creates successive legal interests in chattels by Will without creating a trust
  • Powers of appointment

Please note that the new rule does not therefore apply to other types of property rights such as options

The beauty of the Bill is that the old rules for working out the perpetuity period are brushed aside in favour of one new statutory period of 125 years – s. 5. The perpetuity period starts when the instrument takes effect, s.6(1), except that in the case of exercising a special power of appointment the period starts when the instrument creating the power takes effect and in the case of pension schemes it will start when the member concerned became a member of the scheme.

The new rules therefore only apply to trusts arising or special powers contained in instruments arising after Royal Assent or for trusts in Wills where the deceased executed the Will after commencement of the Act– s.15. So the old rules and statutory exceptions will continue to apply to instruments which took effect (including Wills executed) before the Bill comes into force. This means that in the case of Wills a codicil might be sensible to alter the trust provisions once the Bill commences.

A Will takes effect on the death of the testator for these purposes – clause 20 (6); so for trusts or powers of appointment contained in Wills the perpetuity period starts on the death of the testator.

The exception to this lack of retrospective effect is where the perpetuity period is specified in the trust instrument by reference to lives in being of particular people and it is difficult or not reasonably practicable to ascertain whether or not the lives have ended. In such a case the trustees, by irrevocable deed, can state the perpetuity period is 100 years from the commencement of the estate or interest. Please note that this useful rule may be of no assistance if the ‘lives in being’ restriction was not on the trust itself but on the power of appointment as to when it might be exercised. S.12 does not seem to address this and may result in some confusion in practice with old pre 1964 trust instruments needing careful scrutiny.

Where instruments are created by the exercise of a general power after commencement of the Act the perpetuity period will be 125 years beginning on the date the power is exercised, not the date on which the power was created – clause 6 (2).

If in a particular case the vesting of an interest may occur outside the perpetuity period clause 7 says that you must ‘wait and see’ if this becomes confirmed. Until it is clear the estate or interest is not subject to the rule against perpetuities. Once it is clear it becomes void but that invalidity does not affect the validity of anything previously done.

Powers of appointment

Where the estate or interest is subject to a special power of appointment it will only be treated as void for remoteness if it is not fully exercised within the perpetuity period. For example, Anna creates a trust with a special power of appointment, which is exercisable only when one or more of her grandchildren has attained the age of 35. The power of appointment will be void if none of the grandchildren reach the age of 35 within the perpetuity period. Whereas, a general power of appointment will be valid until it becomes established that it will not be exercisable within the perpetuity period.

Class gifts

Where the inclusion of certain persons as members of a class make it likely that the estate or interest will not vest within the perpetuity period then those persons must be treated for all purposes as excluded from the class from the time it is or becomes apparent that the estate or interest will fail to vest within the perpetuity period; unless their exclusion would exhaust the class – s.8. As with s.7 acts done prior to this point are not invalidated.

s. 9 ensures that a right or interest will not be invalid automatically just because it follows a previous interest which violates the rule. This replicates the existing position under s. 6 Perpetuities and Accumulations Act 1964.

Determinable interests

Determinable interests become absolute if an interest arising under a right of reverter (fee simple) or under a resulting trust, are void for remoteness – clause 10. For example, Sir Archibald grants land to trustees to be held on trust for a local youth club until the land ceases to be used as a sports field. If the land does cease to be used for this purpose it reverts to Sir Archibald or his estate. The effect of the Bill is that Sir Archibald’s interest under the right of reverter is treated as a successive interest arising on the determination of a determinable estate and is therefore subject to the rule against perpetuities.

Conditions precedent and subsequent

The rule applies to property held on trust which is subject to a condition precedent e.g. to my nephew Simon provided he becomes a Professor at Cambridge (s. 1 (3)). It also applies to the rights of the person who will become entitled to the property if there is a condition subsequent which is broken e.g. To my trustees to be held on trust for the children of my niece Elizabeth provided none of them is divorced by the age of 30, in which case the trust fund passes to Action for Children. The effect of s. 1 (4) is that the rule applies to the rights of the charity Action for Children to take the fund on the divorce of any of Elizabeth’s children before the age of 30. If all of them remain single or marry and do not get divorced by the age of 30 then the charity’s interest will fail and each child’s interest will become absolute.

Accumulations

Section 13 conveniently abolishes the current rule which only permits accumulation of income for 21 years. The removal of the statutory restriction means that income may be accumulated for the full length of the perpetuity period.

Sadly, the repeal of current law only applies to instruments creating powers and duties to accumulate which take effect after the Bill comes into force, including Wills executed after that date and not those executed before.

The exception to this rule is charitable trusts. It will no longer be possible to accumulate charity income for more than 21 years unless approved by the Charity Commission or the Court. The reason appears to be that income which is supposed to be applied for charitable purposes should not be prevented from being so used for too long.

The 21 year rule will also apply to non-charitable purpose trusts e.g. for the care of animals or gravestones.

Practice points

  1. New trusts and Wills containing trusts or powers may be best to apply from the commencement of the Act to include the beneficial 125 year perpetuity period and relaxed accumulation rules.
  2. If the new rules are preferred by the testator, a codicil to a Will will be useful post commencement of the Act to revise the perpetuity period to 125 years and change the accumulation period.
  3. Old trusts containing the ‘royal lives’ or other lives clause for perpetuity purposes may be varied by deed. The trustees can opt for the 100 year rule by declaring that it is difficult or not reasonably practicable to tell when the perpetuity period has come to an end.
  4. Once again trust administrators will have to note which trusts are subject to the old rules against perpetuities and accumulations whilst treating differently trusts created after the Act comes into force.

© Gill Steel, LawSkills Ltd. 2009

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