Wednesday, November 28, 2012

Rule Against Perpetuities: An Example

The following was asked by a reader of the blog:

I'm trying to understand the rule against perpetuities, can you explain why if there is a grant from X to A for life, and then to A's children, and then upon the death of the last survivor of the children, to A's grandchildren, violates the rule.

Response:

When analyzing a Rule Against Perpetuities problem it's really important to remember we are dealing with possibilities, and not with certainties. In other words, if it's at all possible that one of A's grandchildren's interest will vest more than 21 years after some life in being at the creation of the interest than the rule is violated.

The rule states that no interest in property is valid unless it must vest, if at all, no later than 21 years after some life in being at the creation of the interest. With that rule in mind, let's examine X's grant.

When dealing with a problem such as this one, you should ask yourself whether there is any possibility that a grandchild's interest will vest more than 21 years after any of the people who were alive when the interest was granted. Here, that possibility exists in the following scenario:

Assume the grant from X took place is 1950. At the time of the grant, assume A had 3 children, B, C, and D. In 1955, A has a fourth child, E. The key is to realize that E cannot be used as a measuring life, as E was not alive (or E was not a life in being) in 1950 when the original grant took place.

Assume further that in 1960 A, B, C, and D all die in a plane crash. Upon the death of A, E's interest will vest. Assume that E, who has a child, F, dies in 2010. At that moment the interest of F (a grandchild of A) is supposed to vest, but the only measuring lives available to F are A, B, C, and D. They all died in 1960, 50 years prior to the vesting of F's property.

So, because it's possible for F's (or any grandchild's) interest to vest more than 21 years after all lives in being at the creation of the interest (A, B, C, and D), F's interest fails under the Rule Against Perpetuities.



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