Remember the rule against perpetuities from law school? Although the rule against perpetuities is often associated with famous old English cases, it is actually a modern problem. As reported by the ABA Journal, the rule recently played out when the heirs of a “cantankerous Michigan lumber baron” finally reached the end of a $100 million waiting game for his estate, 92 years after his death. The rule may be old, but it still applies and California attorneys need to know how it works in this state.
The rule against perpetuities is a common law concept that still applies in most states. It generally provides that a trust may not last longer than 21 years after the death of the last potential beneficiary to die who was living at the time the trust was established.
California has enacted the Uniform Statutory Rule Against Perpetuities (USRAP) (Prob C §§21200-21231), which provides that a trust may last at least 90 years before the common law rule is applied. Prob C §21205. This 90-year “wait and see” approach in USRAP now applies in most states.
This can be a long time. For example, a trust established in 1951 by the will of newspaper publisher William Randolph Hearst is expected to last until at least 2040. See Hearst v Ganzi (2006) 145 CA4th 1195, 52 CR3d 473.
Current tax law encourages trust dispositions that challenge the rule by tying up property in future interests, especially exempt trusts under the generation-skipping transfer (GST) tax. See IRC §§2601-2663. These trusts usually involve extensive use of powers of appointment and discretionary powers in trustees—provisions that are particularly susceptible to unanticipated violations of the rule. Note that the Obama Administration’s revenue proposals would limit the duration of the GST exemption to 90 years—the minimum vesting period under USRAP.
Attorneys planning and drafting wills in California must be familiar with the USRAP.
Here are some rules of thumb that can serve as general will drafting guidelines for California attorneys, taking into account the rule against perpetuitites:
- By will (or by wholly revocable living trusts but not by deed or irrevocable inter vivos trust), a client can create interests to vest in his or her own grandchildren and can even require survival up to age 21.
- A testator generally cannot create interests in his or her great-grandchildren or even in his or her grandchildren to vest at an age over 21 years (unless in either case the testator outlives all the children).
- A testator cannot create interests in anyone else’s grandchildren or even in the children of another with age contingencies over 21, unless that person predeceases the testator.
Keep in mind that often these “prohibited” objectives can still be achieved for the client, at least substantially, by skillful drafting.
To help with all of your will drafting issues relating to the rule against perpetuities, go to CEB’s California Will Drafting, chap 34. Also check out CEB’s Drafting California Irrevocable Trusts, chap 13A. For a form of perpetuities savings clause, see Drafting California Irrevocable Trusts §§19.10-19.11.
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