ULC

Statutory Rule Against Perpetuities Summary

In American property law, rights to possession, use and/or consumption of property exist in, or run with, time. The limitations or extent of rights depend upon time. All the rights that one may have—full ownership or fee simple ownership (of real property)—mean all the rights that a person may have for infinite time. But it follows that rights may be owned or held for less than an infinite amount of time. And so we have such interests in property as "estate for years" and "life estates." With such property interests, there is a remainder interest which occupies the time after the "estate for years" or the "life estates" terminate. These interests are called "remainder interests," and they are interests in property that can arise only at a time in the future. Hence, they are called "future interests."

Future interests become even more complicated because they may be "vested" or "nonvested" interests. A "vested" future interest belongs to someone now—immediately—even though the person to whom it belongs may not come into actual possession of the property for years. A "nonvested" interest belongs to no one until some event in the future determines who actually takes it. For example, James may, by deed, give Smith an estate for life in specific real estate, while giving the remainder to all of Smith's children alive at the time Smith dies. This remainder cannot vest until Smith dies, because it cannot be determined how many children might be born to Smith (or adopted by Smith) and how many might be alive when he dies, until his actual death. The remainder will vest only when he dies and the life estate terminates.

Nonvested future interests have been a part of American property law, as an inheritance from English common law, since the time of the original thirteen colonies. But the common law has also established limitations upon nonvested future interests. The principal limitation is expressed in terms of time, and the policy to be served is simple—the law does not favor nonvested future interests that cannot vest, or will not vest, within a cognizable time period. The classic expression of this limitation is called the "Rule Against Perpetuities." The accepted common-law formulation of the Rule is as follows:

"No [nonvested property] interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest."

The common-law Rule appears simple, but it has evolved into a kind of conundrum in its application. Improperly drafted deeds, trusts, instruments, and wills can result in invalid future interests. These are frequently interests that should not be extinguished, and people are injured as a result.

There are two fundamental problems with the common-law Rule that lead to such harsh results. The Rule depends upon possible, not actual, events. Any hypothetical violation of the Rule, no matter how improbable, extinguishes otherwise legitimate interests. It is also an all-or-nothing kind of Rule. If one member of a class of possible takers of a future interest potentially takes a vested interest beyond the prescribed time, the interests of all members of the class fail. The Rule Against Perpetuities challenges those who draft property documents. A slight inadvertence can have a very drastic and harsh effect.

Nobody questions the fundamental policy. Perpetual nonvested interests should not be permitted. The problem is to serve this fundamental policy while eliminating the harsh effects of the common-law Rule. This is the role the Uniform Statutory Rule Against Perpetuities is designed to play.

The common-law Rule has a validating and invalidating function. Those interests that meet the prescribed time period are absolutely valid and unassailable. Those that violate the Rule are absolutely invalid. The Uniform Statutory Rule principally affects the invalidating side of the common-law Rule. If a future interest must vest within the prescribed period of a life in being plus 21 years (the common-law formula), it is a valid interest under the Uniform Statutory Rule. But, if it violates the Rule in some hypothetical sense, the Uniform Statutory Rule does not, absolutely, extinguish an interest.

The Uniform Statutory Rule adopts what has become known as the "wait-and-see" approach. This is the principal reform of the common-law Rule. Rather than invalidating future interests based on hypothetical possibilities, the Uniform Statutory Rule provides a period of time within which an interest can actually vest. If it does, it is saved. If it does not, then it is invalid. We wait and see, in other words, if an interest will, in fact, vest.

The basic statement of the Rule in the Uniform Statutory Rule is as follows:

"A nonvested property interest is invalid unless:

(1) when the interest is created, it is certain to vest or to terminate within the lifetime of an individual then alive or within 21 years after the death of that individual; or

(2) the interest either vests or terminates within 90 years after its creation."

The initial part of the Rule restates the common law and validates interests that meet the basic test. The second part of the Uniform Statutory Rule deals with invalidation. It sets a period of time, 90 years, within which actual vesting validates an interest. Invalidation can occur only if the future interest has not vested 90 years after its creation. We "wait and see" 90 years.

Why a fixed number of years? It is the simplest and least capricious way to measure time. Why 90 years? To give ample time, within the lifetimes involved in measuring these interests, for a nonvested future interest to vest. Ninety years represents an estimate of the actual time most extended future interests will take, at the outside, to vest. If they do not vest, 90 years is a sufficient time to justify invalidating such interests.

Powers of appointment are given separate treatment in the statement of the basic Rule in Section 1. A "power of appointment" leaves to another person the opportunity to designate who takes nonvested future interests. They are traditionally subject to the "Rule Against Perpetuities." The Uniform Statutory Rule deals with them separately from other property interests because of particular distinctions made between general and non-general powers, testamentary and non-testamentary powers. But the Rule is fundamentally the same. If a delegation of a power vests within the common-law time for vesting, it is absolutely valid. Otherwise, "wait and see," the 90 year period, applies to the question of invalidity.

Beyond the "wait-and-see" approach to invalidity, the Uniform Statutory Rule gives invalid future interests a second chance. Section 3 permits a court to reform an invalid interest or power of appointment "in the manner that most closely approximates the transferor's manifested plan of distribution..." The court can reform interests by vesting them within 90 years of their creation. So, even if 90 years pass and there is no vesting of an interest, the appropriate court can save it from extinction.

The remainder of the Uniform Statutory Rule copes with issues inherent in the basic application of the "Rule Against Perpetuities." Section 2 settles questions of the creation of nonvested property interests because the Rule begins to run at the time an interest is created. And there are some kinds of interests to which the Rule should not apply. These are the subject of Section 4. An example is a fiduciary's power relating to the administration or management of assets. Fiduciary powers are technically nonvested in character, but are no threat to the ultimate determination of property ownership. It would, therefore, be inappropriate to apply the Rule against fiduciary powers.

The Uniform Statutory Rule Against Perpetuities eliminates the onerous burdens of the common-law Rule without disturbing the basic policy which the common-law Rule evolved to serve. It should be adopted in every state.