The Often Misunderstood Rule Against Perpetuities

The Often Misunderstood Rule Against Perpetuities

By Jennifer F. Hillman, Esq.

The Rule Against Perpetuities is an often misunderstood rule which strikes panic in the hearts of many law students and practitioners alike. Simply put, the rule limits the ability of owners to control future dispositions of their property.

Under NY EPTL 9-1.1(a), any present or future interest is void if it extends the absolute power of alienation for a period beyond "lives in being" at the creation of the estate, plus 21 years. The rule solely applies to interests that do not vest within that time frame. Thus, in a trust created with income to X for life, and remainder to Y, Y's interest is vested and determinable upon creation of the trust and does not violate the rule. However, a trust wherein X gives income to "his children" for life, and the remainder to "his grandchildren," the remainder interest is invalid because it only vests if all of the grandchildren were born within lives in being (at the time the trust was created) plus 21 years. See Turano, McKinney's Practice Commentaries NY EPTL § 9-1.1. X could have had a child after the creation of the trust but prior to his death, and then his after-born child could give birth to a grandchild more than 21 years later. The interest could vest too remotely, so it is invalid. Id.  

A recent case out of the Kings County Surrogate's Court, Matter of Mandel, N.Y.L.J., May 3, 2012, at 21, col. 3 highlights practitioners' continued misunderstanding of the rule against perpetuities. Mandel addressed a testamentary trust where the trustee attempted to terminate the trust for failure to comply with the rule, along with other challenges. The trust, created in 1945, divided a portion of the decedent's residuary estate into seven equal parts, one for each of his children. The trust provided that each part be held in trust for the benefit of the children until the death of the child, or another designated second measuring life. The second measuring life of each sub-trust was either a named grandchild of the decedent or another named individual whose relationship was unknown - each of whom was a "life in being" at the time the trust was created. Upon the death of any child, the trust continued during the lifetime of the secondary measuring lives, with the monthly annuity payments being made to his or her issue.

The trustee sought to terminate the trust as violative of the Rule Against Perpetuities because it failed to provide for the distribution of the remainder of any sub-trust once terminated. The Court noted that this argument was based upon the "faulty assumption" that the failure to expressly provide for the distribution of the remainder interest upon termination results in no one being entitled to the remainder interest.

Annuity trusts have been consistently construed as providing that any remainder existing upon termination of the trust pass to the annuitant or his beneficiaries whether by will or intestacy. This is because the testator often assumes in creating an annuity trust that the trust would be depleted before it terminates. In construing the trust provisions, the Court determined that the principal and unexpended income at the termination of each sub-trust would be distributed to the grandchildren of the designated child, and the issue of the pre-deceased grandchildren surviving at the termination of the sub-trust, per stirpes. Even if the will was not construed in that manner, the testator's failure to provide for a taker of the remainder interest upon termination would result in the remainder interest passing to the testator's intestate heirs.

Regardless, the Court determined that there was no gap in alienability or vesting. Each sub-trust must end and be distributed within two lives in being at the death of the decedent, and thus the Rule Against Perpetuities was not violated. The interests vested within the appropriate time frame, even if the distribution of the remainder of the interest upon termination of the trust was not specifically stated.

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Jennifer F. Hillman is an attorney at Ruskin, Moscou Faltischek, P.C., Uniondale, New York where her practice focuses in the area of trust and estate litigation. She can be reached at jhillman@rmfpc.com

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