3/2/2011 11:48:00 AM Property section 2, Spring 2011 Professor Craig Oren

Handout on the Rule Against Perpetuities. Our class treatment of the Rule Against Perpetuities has This memo picks up some loose ends. The memo gives answers to the problems on page 260, #6. I've also included some discussion of the effects of recent changes in perpetuities law, with emphasis on New Jersey. But first let me remind you how to solve a perpetuities problem. Begin each problem by classifying each of the interests created. This will allow you to determine which, if any, are subject to the Rule. Remember that the Rule only applies to contingent future interests created in transferees contingent remainders, executory interests, and vested remainders subject to partial divestment. Once you've classified the interests and decided which are subject to the Rule, follow the procedure recommended by Professor Dukeminier in his Modern Guide, 74 Cal. L. Rev. 1867, 1867-1869 (on reserve in the library). For each interest subject to the Rule, ask yourself: a. What has to happen for the interest to vest (or, in the case of a vested remainder subject to open, what has to happen for us to be able to identify all of the members of the class and for all conditions precedent to be satisfied)? b. Whose lives might affect whether and when the vesting events occur? Those lives will often, but not necessarily, be persons named in the instrument. Only consider lives that were in being when the interest was created. c. Of those lives, is there any of which you can say, as of the time the interest was created, that :the interest cannot possibly vest more than 21 years after the end of this life?" (To put that a different way, "can I guarantee, as of the moment of the interests creation, that the interest will either vest or fail not later than 21 years after the end of this person's life? Can I guarantee that the interest can't still be contingent more than 21 years after the end of this life?"Can I guarantee that the interest cant vest too late?) Such a life is known as a validating life. If you can find such a life, the interest is good. If you cannot, you must strike the interest. You may be comforted by the following statement by John Chipman Gray, who put the rule into

a nutshell by his "concise formulation" on page 285: In many legal discussions there is, in the last resort, nothing to say but that one judge or writer thinks one way, and another writer or judge thinks another way ... In [the Rule Against Perpetuities] this is not so; there is for them a definite recognized rule; if a decision agrees with it, it is right, if it does not agree with it, it is wrong. In no part of the law is the reasoning so mathematical in its character; none has so small a human element.. . . That I have done all my own sums correctly, I do not venture to hope. There is something in the subject which seems to facilitate error. Perhaps it is because the mode of reasoning is unlike that with which lawyers are most familiar. The study and practice of the Rule Against Perpetuities is indeed a constant school of modesty. Gray, The Rule Against Perpetuities, ix-x (3rd edition, 1915). Page 290,,#6 I advise you to look at the rest of this memo only after you have attempted to solve the various parts of problem 6 on page 290. #6. Here we have a devise to A for life, and on A's death to A's children for their lives, and then to B or other individuals under specified conditions. The interest in A's children is a vested remainder subject to open in a life estate, since A has a child. The interest in A's children is good. The vesting event is for A to have children. A can affect whether that happens, and so we look to see if A is a validating life. We find that A is. There is no way for a child to be born to A more than 21 years after A's death. (As we agreed, forget sperm banks!) The interest is therefore valid. (a) B's contingent remainder is valid. The vesting event is for A to die childless. So Bs remainder will vest or fail at A's death. Either A will die childless, in which case B's remainder would vest, or A will not die childless, in which case B's interest fails. There is, again, no way that A can first have children more than 21 years after As death. So A is the validating life.

(b) B's contingent remainder is void. Bs remainder is intended to vest if there is no living grandchild of A at the death of the longest-lived of A's children. The interest would remain contingent for the lives of all of A's children; only then would we know whether A has surviving grandchildren. A can affect vesting by having more children, A's children can affect vesting by having more of A's grandchildren, and the presently-living grandchildren can affect vesting by surviving B. None of these qualify as validating lives. A's children can conceivably outlive A by more than 21 years, and so A cannot be the validating life. A's children who were living at Ts death are not validating lives. Since A is alive, A might have a child after T's death. This child might live more than 21 years after the deaths of those of As children who were living at the time of the devise. The death of the survivor of A's children could therefore conceivably occur more than 21 years after the death of those of A's children who were living at the time of the conveyance. Hence A's presently-living children are not validating lives. Nor are A's currently-living grandchildren validating lives. They could all die, another grandchild might be born, and, by surviving B, that grandchilds interest could vest more than 21 years after the deaths of all of the currently-living grandchildren. Nor is B. B could die and pass B's interest to heirs or devisees who have not been born yet, and whose interest could vest long after B's death. (There is, after all, no requirement that B be living in order to take.) Nor is there anyone else about whom you can say that the interest is guaranteed to vest or fail within their lives or within 21 years of their death. The interest therefore does not satisfy the Rule Against Perpetuities. (c) B's children have a vested remainder subject to open (or, if there are none, a contingent remainder). The interest is valid. The class of B's children will close at B's death. Hence B is the validating life. (d) The contingent remainder in "B's children then living" is void. The vesting event is for a child of B to be living at the death of the longest-lived of A's children. The interest will remain contingent until the end of the lives of all of A's children; only then would we be able to identify which of B's children, if any, can vest.

A's current children are not validating lives. Because A is living at the time of the conveyance, A's children may not all have been born yet; conceivably the current children could die, a new child might be born to A, and this childs interest could vest or fail more than 21 years after the death of all of A's current children. B is not a validating life, because A's children could live more than 21 years after B's death. B's current children are not validating lives, because they could die, and B might give birth to new children whose interest could vest more than 21 years after the death of the current children. Since we cannot find a validating life, the interest is void. (e) The interest in A's grandchildren (either a contingent remainder or a vested remainder subject to open, depending on whether A has any grandchildren yet) is void. The vesting event is the birth of grandchildren to A. A can affect vesting by having children; A's children can affect vesting by having A's grandchildren. A grandchild of A could be born more than 21 years after A's death, and so A is not the validating life. Nor are A's presently-living children. We won't know who all of A's grandchildren are until the death of all of A's children. And since A can have more children, the last of A's children could die more than 21 years after the death of A's present children. Nor are As present grandchildren because they could die and a new grandchild could be more than 21 years after all of them have died. (f) The interest in T's grandchildren (again, either a contingent remainder or a vested remainder subject to open) is valid. Remember that a devise becomes effective upon the death of the testator -- here, T. Since T is dead, we know that T can't have any more children. T can't possibly have any more grandchildren after T's present children have died, and hence the survivor of T's present children is the validating life. Perpetuities Reform You may wonder how changes to the common law Rule would affect the interests we've labeled void. In a state that follows the Uniform Statutory Rule Against Perpetuities (USRAP), the interests that I've labeled void would not be struck down at the outset. Instead, the court would wait for 90 years from the creation of the interests -- If an interest actually vested in that time, the interest would become effective just as if it had been validly created. If, though, the interest were still contingent after 90 years, then the court would reform the instrument to come as

close as possible to T's intent. In Pennsylvania and a few other wait and see jurisdictions, , we would instead wait out the common law perpetuities period. Its not clear for how long we would wait. Professor Dukeminier suggested that we start by identifying the persons living at the creation of the interest who could affect whether or when vesting could occur. (In 290, 6(b), for instance, this would be A and those of A's children and grandchildren living at T's death.) We would then wait out the longest lived of them, plus 21 years. Again, if the interest actually vested in that time, it would become effective just as if validly created. If it were still contingent at the end of that period, it would be struck down. But, as your authors state on page 307, this approach was not adopted by the drafters of the Uniform Statutory Rule Against Perpetuities, who instead opted for the 90-year permissible vesting period Ive described above. Keep in mind there's another possibility; some states, like Delaware and New Jersey, have abolished the Rule. In New Jersey, a future interest is void only if alienability is suspended for longer than a life in being plus 21 years. (In effect, this copies the New York statute discussed on page 295, footnote 32.) Under the New Jersey statute, alienability is considered to be suspended "when there are no persons then alive who, alone or in combination with others, can convey an absolute fee in possession of land, or full ownership of personalty." (N.J. Stat. 46:2f-10 (b)). An interest created in trust is therefore exempt from invalidity so long as the trustee is given the power of sale of the assets, a normal power thats given to trustees. (Indeed, New Jersey presumes that such a power is granted in a trust.) Thus, newly-created trusts will be essentially exempt in New Jersey from the Rule; it will therefore be possible to create a so-called dynasty trust that lasts indefinitely and is tax-free under Federal estate taxation law. Defeasible fees can often satisfy the alienability standard; after all, it's usually possible to determine both the holder of the present estate and the holder of the future interests. Hence a conveyance like "to the Church for use as a church, but it the Church does not use the land for such purposes, to A and his heirs, would be permissible since the Church and A could theoretically agree to a sale. Instead, the New Jersey rule will usually apply only when someone creates a legal life estate -that is, a life estate without using a trust with an unascertainable remainderman. For instance, consider (e) above: to A for life, then to A's children for their lives, then to A's

grandchildren then living. We won't be able to identify A's grandchildren until the death of A's last child, and that child might be someone who wasn't in existence when the interest was created. Therefore we won't be able to identify all of those who hold an interest, and so alienability would be suspended for more than 21 years after any life in being. So that interest would be struck down. Of course, the drafter could accomplish the desired result by creating the interests in trust (e.g. "to X as trustee for A during A's life," etc.) In effect, the New Jersey rule is one more reason why lawyers should not create life estates, but instead should establish trusts with life beneficiaries. Some questions worth asking yourself: what would be the consequences of repealing the Rule Against Perpetuities? Are dynasty trusts a good idea, especially when they can pass from generation to generation without estate taxation? Are such trusts effectively like fee tails? Do we need a rule to curb dead hand control? What is the best approach to reforming the Rule? Please feel free to raise questions about this, whether by seeing me or by posting on the discussion board feature of the webboard. CO/