The Lurking Rule against Accumulations of Income

I. INTRODUCTION The Rule Against Perpetuities is dying an ignoble death. To attract trust business and the lawyers' fees and trustees' commissions that come with it, twenty-one states have abolished the Rule as applied to interests in trust.1 These states have thus authorized perpetual trusts. Real money is at stake. In a recent empirical study, Max Schanzenbach and I found that, through 2003, roughly $100 billion in trust assets have poured into the abolishing states.2 Not surprisingly, perpetual trust legislation is under consideration in several of the states that have not yet abolished the Rule.3 But the Rule Against Perpetuities is not the only rule of property law that bears on trust duration. Another, the rule against accumulations of income, limits the time during which a settlor may direct the trustee to accumulate and retain income in trust to the applicable perpetuities period.4 In the typical case, compliance with the Rule Against Perpetuities ensures compliance with the rule against accumulations. Hence, for 200 years, the rule against accumulations of income has lurked in the shadow of its older and more distinguished cousin, the Rule Against Perpetuities. With the erosion of the Rule Against Perpetuities, however, the rule against accumulations of income may have newfound relevance. Perpetual trusts are more likely than ordinary trusts to prescribe accumulations of income,5 and such trusts are designed to endure beyond the traditional perpetuities period of lives in being plus twenty-one years. This Essay examines the lurking rule against accumulations of income, its relation to the rise of the perpetual trust, and the contemporary policy soundness of the accumulations rule. Part II reviews the Rule Against Perpetuities. Part III offers a history of the rule against accumulations of income. Part FV discusses the rise of the perpetual trust and relevant estate and income tax considerations. Part V assesses the relevance of the rule against accumulations for perpetual trusts. Part VI assesses the contemporary policy soundness of the rule against accumulations. Part VII concludes. II. THE RULE AGAINST PERPETUITIES The Rule Against Perpetuities is a rule against remote vesting. The classic formulation is that of John Chipman Gray: "No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest."6 The period of the Rule reflects a common law policy that a transferor should be allowed to tie up property only for as long as the life of anyone possibly known to the transferor plus the period of the next generation's minority (hence lives in being plus twenty-one years).7 The Rule is said to have two purposes: (1) to keep property marketable, and (2) to limit "dead hand" control. Preventing indefinite fracturing of property ownership implements the first purpose. The idea is that ownership of land periodically will be reconstituted into fee simple because all contingent future interests in the property must vest or fail within the perpetuities period. However, if a future interest is created in trust and the trustee has the power to sell the trust property, as is typical,8 the trust form overcomes the concern with marketability.9 The dead-hand rationale for the Rule is best understood as a response to the disagreeable consequences that can arise from unanticipated circumstances.10 The Rule implements this anti-dead-hand policy by curbing future interests that, after some period of time and change in circumstances, tie up the property in potentially disadvantageous arrangements. As Brian Simpson explains, "given that one can, to a limited extent only, foresee the future and the problems it will generate, landowners should not be allowed to tie up lands for periods outside the range of reasonable foresight."11 Forever is a long time. In a jurisdiction that has retained the Rule Against Perpetuities, the identity of all persons with a claim to the underlying trust property will be ascertained within the perpetuities period. …