The Rule Against Perpetuities (the “Rule”) is an old and complex legal rule that aims to prevent the delay of vesting of many types of transferred property interests beyond the “Perpetuities Period” and is the bane of many lawyers who draft wills and trusts.
A property interest vests when it is absolute and cannot be defeated. There are many ways to transfer property interests, including under a will or through a trust.
The Perpetuities Period is generally defined as the duration of a particular life or lives that exist at the time property is transferred (e.g. at the time of a testator’s death for transfers under a will) (referred to as the “Lives in Being”), plus 21 years. The death of the last surviving Life in Being would trigger the countdown of the 21 year clock. In some jurisdictions, the Perpetuities Period has a statutory maximum term, such as 100 years.
The Rule works by invalidating the transfer of a property interest when there is a possibility that it may not vest absolutely within the Perpetuities Period. Generally, when a gift is invalidated under the Rule, it reverts back to the person who established the trust or to the estate of the person who made the will or as on an intestacy. The result is that the ultimate beneficiaries may be entirely different from those the donor intended.
What is the rationale for the Rule? It was developed in the 1600s under English law for the purpose of restricting a person’s power to control perpetually title to property after death. In that era, it had become common to keep land ownership within aristocratic dynasties for generations through trusts that postponed vesting indefinitely. Although such planning helped retain property within families, their individual members were deprived of the ability to freely deal with it, including bequeathing and selling it as they, and not their forefathers, desired. This “dead hand control” was thought to be unfair to both the beneficiaries of such trusts and society in general. Another significant social concern was that keeping property from commercial circulation avoided its taxation. The Rule was therefore accepted as a tool balancing the interests of donors, future generations and of society as a whole.
The Rule, as set by English case law, was adopted by many common law countries, including Canada, Australia and the U.S., but not all of them. For instance, South Africa has not adopted the Rule and, in some cases, real estate there has been tied up for multiple generations.
Today, the countries that employ the Rule have seen a movement towards its amendment or even abolition. An important amendment of the Rule has been the adoption of the “wait and see” approach to assist with saving gifts that may otherwise fail under the Rule. This amendment permits waiting until actual events establish whether an unvested interest ultimately vests within the Perpetuities Period and only when there is certainty that the interest will not vest will the interest be invalidated.
To date, three Canadian provinces, as well as 21 U.S. states, Ireland and South Australia have abolished the Rule completely. In 2012, the Uniform Law Conference of Canada recommended that the Rule be abolished in all Canadian jurisdictions. The reasons for abolishing the Rule include the view that there are other legal means for resolving societal concerns regarding ownership and taxation of perpetually unvested interests.
For instance, in Canada, all the common law jurisdictions have enacted trust variation legislation, which allows a trust to be varied or even terminated, provided all the adult and capacitated beneficiaries consent. This means a court may vary a trust clause if its terms are too remote. Also, the Canadian Income Tax Act deems most trusts to dispose of their capital assets every 21 years, forcing the trusts to either pay capital gains tax on the accrued gains on such assets or to transfer the assets out to the beneficiaries, thereby causing interests in those assets to vest and be taxed in the beneficiaries’ hands. Another view in favour of abolition is that the Rule is so antiquated and complex that applying it correctly is a nuisance. Legal observers note that they have not yet observed problems from the absence of the Rule in those Canadian and American jurisdictions that have abolished it.
The Rule has had a valid purpose, but it has flaws and its future is uncertain. We will likely move towards its complete abolition in Canada. Until the Rule is terminated, however, it is important to ensure that, where it applies, all wills and trusts are drafted with precision to ensure that donors’ wishes are carried out as intended and no interest fails because it cannot vest within the Perpetuities Period.
Peter Ray Cotton-O’Brien, “A Case for Uniformly Abolishing the Rule Against Perpetuities in Canadian Trust Law” (2017), 36 Estates, Trusts & Pensions Journal, 230, at p.240.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.