The abolition of perpetuity periods: Time to sound a note of caution?

Introduction

By the Perpetuities (Amendment) Act 2024 (“Act”)ⁱ, the Cayman Islands has joined the ranks of jurisdictions to disapply the “rule against perpetuities” (the “Rule”).

The common law world of trusts remains divided between systems of law that maintain the Rule and those that have abolished it.  Even within the USA, divisions exist between states that have adopted the Uniform Statutory Rule Against Perpetuitiesⁱⁱ (“USR”), which introduces a “wait and see” approach, namely that an interest will not be invalid if it actually vests, and a 90-day statutory perpetuity period. The USR has been adopted by a majority of states. A minority of states retain the older common law position, that an interest is invalid if it does not vest within 21 years of life-in-being at the creation of the interest, and a smaller minority have abolished the Rule or limited its application altogether. Across the Atlantic, more than a quarter of a century ago the Law Commission of England and Wales (“Law Commission”) considered the possibility of abolishing the Rule but decided ultimately against it.ⁱⁱⁱ  

The Rule is ancient, although not as ancient as trusts themselves. In England and Wales, it has been the subject of incremental reform (in 1964^iv and 2009^v), but many other jurisdictions such as Jersey and Bermuda have gone further and abolished it altogether, to whose numbers the Cayman Islands can now be added.

There are sound reasons why the Rule may be unattractive, especially when trusts are used as dynastic vessels of family wealth. Why should the settlor be constrained in how long he or she wishes a trust to operate? What can be perceived as an arbitrary limit on the “lifespan” of a trust might seem at odds with the flexibility that trusts offer to settlors. However, there are significant implications for future generations of “perpetual” trusts that merit careful consideration. A wise settlor may well wish to consider whether just because he or she can settle a trust without a perpetuity period, he or she should establish such a trust.

What is the Rule?

The Rule’s name is not particularly helpful – it has been said a better name would have been the rule against remoteness. There is no rule of law against a person having a perpetual interest in property – that is, after all, essentially what absolute ownership is. What the rule against perpetuities restricts is the period of time in which an interest in property can begin under a trust.

Applied to a discretionary trust, the effect of the common-law Rule is simple: because it cannot be said with certainty when a trustee might exercise a discretionary power in favour of a beneficiary, unless the time in which the trustee can exercise that discretion is limited to the perpetuity period, the trust is void. In the past this has led to trusts being declared void for technical reasons. For instance, in Re Drummond [1988] 1 WLR 234, a trust in which the common law perpetuity period of a life in being plus 21 years applied, the court initially set aside a trust as void since there was a theoretical possibility that the hypothetical offspring of one of the sisters outside of the perpetuity period could benefit. This decision was reversed by the Court of Appeal who adopted a generous interpretation of the vesting of trust interests. In order to counter this uncertainty discretionary trusts have typically contained express trust periods and ultimate default trusts. In England and Wales, the statutory intervention in 1964 introduced the “wait and see” rule so that trusts that could offend the Rule are not void from the start, but fail only if the interests do not in fact vest within the perpetuity period. However, both the 1964 and 2009 reforms applied only to trusts established after the legislation came into effect.

Why does the Rule exist?

The rationale for the Rule was considered in depth in the Law Commission’s 1998 Report.^vi Three key reasons are put forward for retaining the Rule, which can be summarised as:

• The “Dead Hand Rationale”;
• The disapplication of irksome conditions; and
• The ability to adapt the trust in light of new tax laws, changes to the property and the beneficiaries’ interests.

It is helpful to address each of these reasons in turn.

The “Dead Hand Rationale” refers to the need to strike a balance between different generations in controlling property. For instance, a settlor may wish a farm settled upon trust to be used for raising dairy cows whereas future generations may wish to use it for harvesting almond milk. In simple terms, the Rule prevents future generations being forever bound by the settlor’s wishes as to how the farm is to be used, because it requires the farm to vest absolutely in somebody before the end of a fixed period of time.

Irksome conditions can encompass requirements such as the need for trustees to provide a written statement of accounts delivered by hand to each of the beneficiaries, or providing that changes to trusteeship or protectorship are endorsed on the original copy of the deeds. Electronic communications, digital document management and physical distances between trustees, other fiduciaries, trust administrators and beneficiaries render such provisions burdensome. Although there are statutory powers to amend and vary trusts, and more modern trust instruments may reserve powers of amendment on trustees, there is an argument that it is helpful as a matter of policy to have a mechanism that places a longstop date on trusts established at one point in time that may struggle easily to be adapted to prevailing circumstances many decades later. The Rule arguably accomplishes this objective.

The same logic that applies to the administrative burdens of old trusts may apply with even more force given the changing nature of property and beneficiaries. For instance, in the past it was common for estates to pass by primogeniture, but the socioeconomic problems of tying up property in perpetual succession were a reason for abolition of the entail in England and Wales in 1925. The Rule is another way of ensuring that a settlor cannot bind future generations’ use of property forever.

The alternative to the Rule is that trusts become outdated, expensive and unwieldly to manage. More frequent applications to court may be required to amend and update an obsolete trust. Increasing pressure from beneficiaries may be expected for discretions to be exercised in their favour, which may be contrary to the expressed wishes of the settlor. The risks are greater cost and greater chances of discord amongst beneficiaries and between beneficiaries and trustees. There may also come points where it becomes difficult to find trustees who would be willing to take on the burden and risks of managing such trusts.

The Cayman Islands reforms

The Act removes the requirement for Cayman Islands ordinary trusts to be subject to a perpetuity period.^vii The perpetuity period was previously set at 150 years subject to a “wait and see” period. Abolishing the Rule means that non-charitable trusts that can last forever can be created in the Cayman. It also means that existing trusts that are subject to a perpetuity period may be altered by an application to court.

Many welcome the Act as bringing Cayman trusts into the future by expanding the freedom of settlors to dispose of property as they wish, and aligning the Cayman Islands with other jurisdictions which offer this opportunity to settlors. The reform is likely to be particularly popular with settlors coming from non-common law backgrounds, such as continental Europe and the Middle East, who are unfamiliar with trusts but perhaps more familiar with other asset-holding structures that have always been capable of existing in perpetuity, such as foundations or companies.  They stand to be reassured that they can now establish a trust to last forever in a similar way.

Conclusion

In this light, moves to permit trusts to last indefinitely in the way that companies and foundations can, may seem uncontroversial, and the Rule an anachronism. The flexibility of the common law trust has always been one of its great attractions, and liberalising or abolishing the Rule is consistent with the flexibility settlors expect.

But it is worth remembering that a key difference between a trust and asset holding structures that have separate personality is that a trust is, at its heart, a legal relationship, not a container. The terms on which the settlor parts with the assets to the first trustee leave a permanent mark on the trust in a way that is fundamentally dissimilar to, say, the subscribers to a company. Part of human experience is the inability to predict the future. The Rule addresses this weakness by providing for a longstop date for trusts, at a point where there will be likely no living witnesses to the initial act of trust between settlor and trustee. Perhaps before rushing to set up a trust that lasts forever, whether in the Cayman or elsewhere, settlors should pause – and take advice. There is surely a certainty in knowing that a trust in an uncertain world will not last forever. 

ⁱ  On 23 July 2024, the Cayman Parliament passed the Act. 
ⁱⁱ  Drafted by the National Conference of Commissioners on Uniform State Laws in 1986 and updated in 1990. 
ⁱⁱⁱ  Law Commission’s 1998 report The Rules Against Perpetuities and Excessive Accumulations (Law Com. 251) HC 579 (“1998 Report”).
^iv  The Perpetuities and Accumulations Act 1964 introduced three key reforms to the Rule. Firstly, it permitted a fixed perpetuity period of up to 80 years instead of the common law period of a life in being plus 21 years. Secondly, a gift would only be void if it in fact did not vest, this is known as the “wait and see” principle. Thirdly, a number of gift saving devices were introduced.
^v  The Perpetuities and Accumulations Act 2009 introduced a single statutory perpetuity period of 125 years.
^vi  Paragraph 1.9 of the 1998 Report.
^vii Cayman Islands STAR trusts are not (and never have been) subject to the perpetuity period.