Rule against perpetuities (RAP)

The Rule Against Perpetuities (RAP) is a rule in Anglo-American common law that requires that all future interests vest, at the latest, 21 years after the end of the life of the youngest living beneficiary at the time of the trusts creation. This precludes trusts from existing in perpetuity, which would understandably be suboptimal for the tax authorities. The rule also applies to estates.

Whereas charitable trusts may last forever, private trusts must have a limited term under the common law. If the RAP conditions are not respected a trust will be disregarded for tax purposes. At the time of the trusts creation the beneficiary roster, or class of beneficiaries must be ‘closed’, so as to be able to determine their ages. No further beneficiary members may be added beyond this point.

Certain US states have different interpretations of the RAP rules, which are notoriously challenging to interpret given that the rule itself is very brief:

No interest is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest.

Furthermore, it is a very old rule, with its genesis in 1682. A legal judgment of the British House of Lords established the common law rule against perpetuities. The case related to establishing inheritance for grandchildren of Henry Howard, 22nd Earl of Arundel including grandchildren who were not yet born.

Presently there are numerous states (and countries) that permit trusts to run for hundreds of years if not forever. Given the ability of the Grantor’s ‘dead hand‘ to be able to control the assets, potentially forever, with minimal taxes payable, the appeal of Dynasty Trusts is patently clear.

Mr. Client and his intended beneficiaries all live in a state that prohibits dynasty trusts with indefinite lifespans. Mr. Client wishes for his wealth to ‘live’ for as long as possible inside of a trust, providing for cost of living expenses for his family. Despite his wealth managers best efforts to get Mr. Client to consider a “dynasty trust state” Mr. Client is resolute that he wants his trust to be in-state. Making sure to not fall afoul of RAP rules, and also ensuring that Mr. Client’s choice of beneficiaries does not create a tax obligation by exceeding his generation skipping transfer tax (GSTT) credit, the decision is made to maximize the lifespan of the trust by having it run for 21 years after the death of the youngest, presently living beneficiary (that does not create a GSTT issue)- Mr. clients youngest son, presently 26 years old.

Based on her life expectancy, Mr. Client is content to know that his family is likely to enjoy the proceeds of the trust for the next 70 years.