Articles - Perpetuities and Accumulation Act

WATCH OUT, WATCH OUT, THERE'S A PANDA ABOUT

COMING TO ENGLAND & WALES 6th APRIL 2010

This PANDA is somewhat different from the black and white, bamboo-munching bear we all love. However, this new PANDA also comes in black and white and has amazing longevity - up to 125 years. To be precise, this is the long-awaited Perpetuities and Accumulation Act 2009.

History

The rule against perpetuities developed as a common law rule. To date, all trusts have a period at which they must be brought to an end because they cannot be allowed to continue in perpetuity. In contrast, the rule against excessive accumulations is a product of statute.

The 20th century intention of the rule against perpetuities was to limit the time period by which future vesting could be postponed and to limit accumulations. The common law decisions and statute of the past 800 years was simplified by the first Perpetuities and Accumulations Act 1964.

Second Time Around

In March 1998, the Law Commission published recommendations to update the 1964 legislation called, the rules against perpetuities and excessive accumulations. Their report looked at two legal concepts - the rule against perpetuities and the rule against excessive accumulations. The new Perpetuities and Accumulations Act 2009 will bring into force those recommendations on 6th April 2010.

Up until now the rule against perpetuities set a time limit within which assets had to vest in the trust beneficiaries. Under the former rules, the trust period could be calculated according to various methods such as running for a maximum of 80 years, or alternatively a period of a 'life in being' plus 21 years, or by including a 'royal lives' clause. With such a clause, the trust would vest in the beneficiaries within a period ending at the death of the last surviving descendent of a deceased monarch. From a 21st century perspective, this appears to be a quaint oddity but it seems that its days are finally numbered. An example of a royal lives clause is as follows,

"The last day of the period commencing on the date of this Deed and ending 21 years after the death of the last survivor of the descendents living at the date of this Deed of His late Majesty King George V"

It is not without surprise that difficulties often arose for trustees trying to identify who were the last remaining descendants of a particular deceased monarch and furthermore, whether they were still alive.

Prior to the enactment of this new legislation, the rule against excessive accumulations applied when a trustee was given power in the trust deed to accumulate income rather than being obliged to distribute that income to the trust beneficiaries. The accumulated income could then be added to the trust capital. Normally, the trustee could accumulate income for a maximum period of 21 years before being under a duty to distribute the trust income to the beneficiaries.

The Perpetuities and Accumulations Act 2009 is intended to overhaul and simplify the above rules, making them fit for the 21st Century and beyond.

What does the new Act do?

Rule against perpetuities

• There will now be a single, mandatory, perpetuity period which is set at 125 years. The perpetuity period applies irrespective of what the instrument creating it provided.
• It applies to all trusts created on or after 6th April 2010.
• The Act is designed to be a one-stop-shop for all information relating to its application.
• There is an exemption for pension schemes.
• The Act is generally prospective and not retrospective. However, the Act allows trustees of pre- 6th April 2010 trusts to opt in to the perpetuities provisions contained in the Act.

Rule against accumulations

• The rule against excessive accumulations is now abolished for all non-charitable trusts created on or after 6th April 2010.
• For charitable trusts, the accumulation period can either be 21 years, or the life of the settlor.

So how do these changes affect the busy practitioner?

All new trusts created on or after 6th April 2010 will need to amend the definition clause for the "Trust Period" in the trust deed. For example,

The 'Trust Perio' shall mean the period ending on the earlier of:

Any power to alter the trust period should be exercised no earlier than the date of execution of such deed or later than the date on which the applicable perpetuity period expires.

The rule against excessive accumulations in the case of all non-charitable trusts has been abolished, therefore a clause limiting accumulations need not be included. Instruments taking effect before commencement of the Act are not affected and so the accumulation period will still be limited for these trusts.

For charitable trusts, there are two accumulation periods available. This can be either 21 years, or the life of the settlor.

It looks like the evolution of the PANDA has reached a new level intended to be incorporated seamlessly into all trust deeds created on or after 6th April 2010. But as with anything new, I expect there will be no shortage of discussion interspersed with numerous "Ooos" and "Aaahs".

Simon A L Clark
Private Client Solicitor

rhw Solicitors LLP