Rules Against Perpetuities

Facts

Property Restatement 2nd Chapter One deals with the rule against perpetuities in donative transfers. This rule requires that an interest in property vest, if it ever vests, within the period of the rule against perpetuities or the interest will fail. The period of the rule is described in § 1.1 of this Chapter One. The time when the period of the rule begins to run in relation to non-vested interests in property is examined in § 1.2. The period of the rule is measured with respect to lives in being when the period of the rule begins to run and the ascertainment of these measuring lives is the subject considered in § 1.3.

The vesting requirement with respect to the rule against perpetuities is presented in § 1.4. The issue here is whether the non-vested interest in property:

(1) must be certain to vest, if it ever vests, within the period of the rule, the so-called what-might-happen approach; or

(2) in fact vests, if it ever vests, within the period of the rule, the so-called wait-and-see approach.

The so-called what-might-happen approach adopted by a majority of the courts has never been remorselessly applied to all non-vested interests in property. The second look doctrine, used in judging the validity of interests created by the exercise of a power of appointment and of the non-vested interests in default of the exercise of such a power, is an adoption of a limited wait-and-see approach that is widely accepted. A non-vested interest that is to vest on the occurrence of either of two stated conditions, one of which might cause the interest to vest too remotely and the other of which, if it occurs, would necessarily cause the interest to vest in time, presents the doctrine of separable conditions. In this situation, it is well recognized that if the condition which must occur in time, in fact occurs, the non-vested interest is valid. This is a wait-and-see result.

In situations other than those described in the preceding paragraph, even though the what-might-happen approach has been widely employed by the courts in the various jurisdictions in applying the rule against perpetuities, there is some judicial authority that has repudiated the what-might-happen approach in favor of a wait-and-see approach (see the Reporter's Note to Section 1.4). A fairly significant number of jurisdictions have changed from the what-might-happen approach to a full or limited wait-and-see approach by legislation (see the Statutory Note to Section 1.4). This Restatement in § 1.4 adopts the wait-and-see approach, the current minority position, with a companion rule in § 1.5 that undertakes to provide a disposition that will vest in time, if after waiting and seeing a non-vested interest does not in fact vest in time.

Most non-vested interests that conceivably might vest too remotely, so far as the rule against perpetuities is concerned, will not in fact vest too remotely, if given an opportunity to vest. Every non-vested interest that conceivably might vest too remotely could be made valid by simply providing that such non-vested interest will take effect if, and only if, it vests within 21 years after the death of the survivor of named lives in being on the date the period of the rule against perpetuities begins to run. In all jurisdictions, such non-vested interest would be valid and it would be necessary to wait and see whether the interest in fact vests in time. In other words, the what-might-happen approach is nothing more than a trap that is easily avoided by appropriate drafting. The adoption of the wait-and-see approach in this Restatement is largely motivated by the equality of treatment that is produced by placing the validity of all non-vested interests on the same plane, whether the interest is created by a skilled draftsman or one not so skilled.

The objections to the adoption of the wait-and-see approach in determining the validity of non-vested interests under the rule against perpetuities are based on the problems allegedly created by the uncertainties as to the ultimate ownership of the property during the period of waiting and seeing what happens. This is not an objection to the wait-and-see approach; it is an objection to the length of the period of the rule. As is pointed out in the preceding paragraph, by proper drafting, the rule against perpetuities allows non-vested interests to be created that will result in an uncertainty as to the ultimate ownership of the property until the period of the rule expires.

What are the problems created by uncertainty as to the ultimate ownership of property that lasts for 21 years after lives in being? It is alleged that this uncertainty subjects the property in which the non-vested interest exists to additional tax burdens. This, of course, is not true, because the owners of non-vested interests are not subject to any death tax where, as is normally the case, one of the conditions attached to a non-vested interest is that the owner survive to the date of vesting. Under the generation-skipping tax rules, a taxable termination does not occur on the death of a person who has only a future interest, and a non-vested interest is always a future interest.

Most non-vested interests in property are equitable interests under a trust. Their existence in this context does not prevent the trustee from disposing of the legal title to the trust assets. Thus, the objection raised that the disposition of property is unduly curtailed under the wait-and-see approach is not true so far as the legal title is concerned. As to the equitable interests under the trust, the wait-and-see approach does not hinder the transfer of the equitable interest to any greater extent than the rule itself allows such transfer to be hindered by a properly drafted instrument. The same is true as to non-vested legal interests.

The wait-and-see approach has been in operation in Pennsylvania for over 30 years. Recently the highest court in that state spoke favorably of the wait-and-see approach in a situation not governed by the statutory adoption of the wait-and-see rule, and the legislature has amended the wait-and-see statute to make it applicable to interests created before the date the statute was enacted. Pennsylvania has not found living with the wait-and-see rule a particularly difficult matter. Every other state has been living with the wait-and-see rule to the extent properly drafted instruments creating non-vested interests are involved.