Trust & Estates and the Rule Against Perpetuities

Winter 1999

Many people have never heard of the Rule Against Perpetuities ("the Rule"). Yet it may have a profound affect on estate planning for those individuals who choose to utilize trusts and other estate planning vehicles that may last for many years. Basically, the Rule Against Perpetuities states in legal terminology that "no [contingent] 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." Gray, Rule Against Perpetuities, 191 (4th ed., 1942). The problem with the Rule is that there is basically no easy way to explain or apply the Rule on a consistent basis. Each State has found its own interpretation of the Rule and in many cases the interpretation provided by one State's courts, as well as legislated exceptions, will differ from that of another. For example, when applying the Rule a general interpretation has been that "lives in being" are interpreted from the date of the Testator's death while other interpretations and/or legislative enactments provide that "lives in being" can be tracked from the date of the Testator's death and at such time as the last "life in being" ends we can apply the Rule. Now, as is obvious from the ambiguities present in the Rule, we may have differing results depending upon how we view the time line for application of the Rule (i.e. Does the 21 years track from the Testator's death assuming all lives in being could end at such time, or does the 21 years track from the actual end of the last of the lives in being at the Testator's death?). Accordingly, given the many difficulties presented by the varying interpretations of the Rule, most Last Wills and Testaments merely provide a clause that may state that all interest created under the Will will be considered vested prior to the twenty-one year time limit if they would otherwise violate the Rule.

As with many things we have become accustomed to in our world, the impact of the Rule too is changing. For example, as of October 31, 1998 the State of Maryland eliminated the rule against perpetuities. This change now allows Maryland residents (for estate and probate purposes) to establish perpetual dynasty trusts (trusts which can effectively exist forever). However, you should be aware that given that the majority of States still retain some form of the Rule, if at the time of probate the decedent is not a resident of Maryland or the trust falls under another State's probate laws, you then run the risk of violating the Rule which may cause a substantial alternative disposition of estate assets. Accordingly, now more than ever it is critical that any person changing their State of residence have their Wills and ancillary estate planning documents reviewed to consider and adjust for the differences between States' laws and ensure that their intentions are accurately laid out.