SECTION 2-901. STATUTORY RULE AGAINST PERPETUITIES.
(a) [Validity of Nonvested Property Interest.] A nonvested property interest is invalid unless:
(1) when the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive; or
(2) the interest either vests or terminates within 90 years after its creation. (b) [Validity of General Power of Appointment Subject to a Condition Precedent.] A
general power of appointment not presently exercisable because of a condition precedent is invalid unless:
(1) when the power is created, the condition precedent is certain to be satisfied or becomes impossible to satisfy no later than 21 years after the death of an individual then alive; or
(2) the condition precedent either is satisfied or becomes impossible to satisfy within 90 years after its creation.
(c) [Validity of Nongeneral or Testamentary Power of Appointment.] A nongeneral power of appointment or a general testamentary power of appointment is invalid unless:
(1) when the power is created, it is certain to be irrevocably exercised or
(a) [Validity of Nonvested Property Interest.] A nonvested property interest is invalid unless:
(1) when the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive; or
(2) the interest either vests or terminates within 90 years after its creation. (b) [Validity of General Power of Appointment Subject to a Condition Precedent.] A
general power of appointment not presently exercisable because of a condition precedent is invalid unless:
(1) when the power is created, the condition precedent is certain to be satisfied or becomes impossible to satisfy no later than 21 years after the death of an individual then alive; or
(2) the condition precedent either is satisfied or becomes impossible to satisfy within 90 years after its creation.
(c) [Validity of Nongeneral or Testamentary Power of Appointment.] A nongeneral power of appointment or a general testamentary power of appointment is invalid unless:
(1) when the power is created, it is certain to be irrevocably exercised or
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otherwise to terminate no later than 21 years after the death of an individual then alive; or
(2) the power is irrevocably exercised or otherwise terminates within 90 years
after its creation.
(d) [Possibility of Post-death Child Disregarded.] In determining whether a nonvested
property interest or a power of appointment is valid under subsection (a)(1), (b)(1), or (c)(1), the possibility that a child will be born to an individual after the individual’s death is disregarded.
(e) [Effect of Certain “Later-of” Type Language.] If, in measuring a period from the creation of a trust or other property arrangement, language in a governing instrument (i) seeks to disallow the vesting or termination of any interest or trust beyond, (ii) seeks to postpone the vesting or termination of any interest or trust until, or (iii) seeks to operate in effect in any similar fashion upon, the later of (A) the expiration of a period of time not exceeding 21 years after the death of the survivor of specified lives in being at the creation of the trust or other property arrangement or (B) the expiration of a period of time that exceeds or might exceed 21 years after the death of the survivor of lives in being at the creation of the trust or other property arrangement, that language is inoperative to the extent it produces a period of time that exceeds 21 years after the death of the survivor of the specified lives.
Comment
Section 2-901 codifies the validating side of the common-law Rule and implements the wait-and-see feature of the Uniform Statutory Rule Against Perpetuities. As provided in Section 2-906, this section and the other sections in Subpart 1 of Part 9 supersede the common-law Rule Against Perpetuities (common-law Rule) in jurisdictions previously adhering to it (or repeals any statutory version or variation thereof previously in effect in the jurisdiction). The common-law Rule (or the statutory version or variation thereof) is replaced by the Statutory Rule in Section 2- 901 and by the other provisions of Subpart 1 of Part 9.
Section 2-901(a) covers nonvested property interests, and will be the subsection most often applicable. Subsections (b) and (c) cover powers of appointment.
Paragraph (1) of subsections (a), (b), and (c) is a codified version of the validating side of
after its creation.
(d) [Possibility of Post-death Child Disregarded.] In determining whether a nonvested
property interest or a power of appointment is valid under subsection (a)(1), (b)(1), or (c)(1), the possibility that a child will be born to an individual after the individual’s death is disregarded.
(e) [Effect of Certain “Later-of” Type Language.] If, in measuring a period from the creation of a trust or other property arrangement, language in a governing instrument (i) seeks to disallow the vesting or termination of any interest or trust beyond, (ii) seeks to postpone the vesting or termination of any interest or trust until, or (iii) seeks to operate in effect in any similar fashion upon, the later of (A) the expiration of a period of time not exceeding 21 years after the death of the survivor of specified lives in being at the creation of the trust or other property arrangement or (B) the expiration of a period of time that exceeds or might exceed 21 years after the death of the survivor of lives in being at the creation of the trust or other property arrangement, that language is inoperative to the extent it produces a period of time that exceeds 21 years after the death of the survivor of the specified lives.
Comment
Section 2-901 codifies the validating side of the common-law Rule and implements the wait-and-see feature of the Uniform Statutory Rule Against Perpetuities. As provided in Section 2-906, this section and the other sections in Subpart 1 of Part 9 supersede the common-law Rule Against Perpetuities (common-law Rule) in jurisdictions previously adhering to it (or repeals any statutory version or variation thereof previously in effect in the jurisdiction). The common-law Rule (or the statutory version or variation thereof) is replaced by the Statutory Rule in Section 2- 901 and by the other provisions of Subpart 1 of Part 9.
Section 2-901(a) covers nonvested property interests, and will be the subsection most often applicable. Subsections (b) and (c) cover powers of appointment.
Paragraph (1) of subsections (a), (b), and (c) is a codified version of the validating side of
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the common-law Rule. In effect, paragraph (1) of these subsections provides that nonvested
property interests and powers of appointment that are valid under the common-law Rule Against
Perpetuities, including those that are rendered valid because of a perpetuity saving clause,
continue to be valid under the Statutory Rule and can be declared so at their inceptions. This
means that no new learning is required of competent estate planners: The practice of lawyers
who competently draft trusts and other property arrangements for their clients is undisturbed.
Paragraph (2) of subsections (a), (b), and (c) establishes the wait-and-see rule. Paragraph (2) provides that an interest or a power of appointment that is not validated by paragraph (1), and hence would have been invalid under the common-law Rule, is given a second chance: Such an interest is valid if it does not actually remain in existence and nonvested when the 90-year permissible vesting period expires; such a power of appointment is valid if it ceases to be subject to a condition precedent or is no longer exercisable when the permissible 90-year period expires.
Subsection (d). The rule established in subsection (d) deserves a special comment. Subsection (d) declares that the possibility that a child will be born to an individual after the individual’s death is to be disregarded. It is important to note that this rule applies only for the purpose of determining the validity of an interest (or a power of appointment) under paragraph (1) of subsection (a), (b), or (c). The rule of subsection (d) does not apply, for example, to questions such as whether a child who is born to an individual after the individual’s death qualifies as a taker of a beneficial interest – as a member of a class or otherwise. Neither subsection (d), nor any other provision of Part 9, supersedes the widely accepted common-law principle, codified in Section 2-104, that a child in gestation (a child sometimes described as a child en ventre sa mere) who is later born alive (and, under Section 2-104, lives for 120 hours or more after birth) is regarded as alive during gestation.
The limited purpose of subsection (d) is to solve a perpetuity problem created by advances in medical science. The problem is illustrated by a case such as “to A for life, remainder to A’s children who reach 21.” When the common-law Rule was developing, the possibility was recognized, strictly speaking, that one or more of A’s children might reach 21 more than 21 years after A’s death. The possibility existed because A’s wife (who might not be a life in being) might be pregnant when A died. If she was, and if the child was born viable a few months after A’s death, the child could not reach his or her 21st birthday within 21 years after A’s death. The device then invented to validate the interest of A’s children was to “extend” the allowable perpetuity period by tacking on a period of gestation, if needed. As a result, the common-law perpetuity period was comprised of three components: (1) a life in being (2) plus 21 years (3) plus a period of gestation, when needed. Today, thanks to sperm banks, frozen embryos, and even the possibility of artificially maintaining the body functions of a deceased pregnant woman long enough to develop the fetus to viability – advances in medical science unanticipated when the common-law Rule was in its developmental stages – having a pregnant wife at death is no longer the only way of having children after death. These medical developments, and undoubtedly others to come, make the mere addition of a period of gestation inadequate as a device to confer initial validity under Section 2-901(a)(1) on the interest of A’s children in the above example. The rule of subsection (d), however, does insure the initial validity of the children’s interest. Disregarding the possibility that children of A will be born after his death allows A to be the validating life. None of his children, under this assumption,
Paragraph (2) of subsections (a), (b), and (c) establishes the wait-and-see rule. Paragraph (2) provides that an interest or a power of appointment that is not validated by paragraph (1), and hence would have been invalid under the common-law Rule, is given a second chance: Such an interest is valid if it does not actually remain in existence and nonvested when the 90-year permissible vesting period expires; such a power of appointment is valid if it ceases to be subject to a condition precedent or is no longer exercisable when the permissible 90-year period expires.
Subsection (d). The rule established in subsection (d) deserves a special comment. Subsection (d) declares that the possibility that a child will be born to an individual after the individual’s death is to be disregarded. It is important to note that this rule applies only for the purpose of determining the validity of an interest (or a power of appointment) under paragraph (1) of subsection (a), (b), or (c). The rule of subsection (d) does not apply, for example, to questions such as whether a child who is born to an individual after the individual’s death qualifies as a taker of a beneficial interest – as a member of a class or otherwise. Neither subsection (d), nor any other provision of Part 9, supersedes the widely accepted common-law principle, codified in Section 2-104, that a child in gestation (a child sometimes described as a child en ventre sa mere) who is later born alive (and, under Section 2-104, lives for 120 hours or more after birth) is regarded as alive during gestation.
The limited purpose of subsection (d) is to solve a perpetuity problem created by advances in medical science. The problem is illustrated by a case such as “to A for life, remainder to A’s children who reach 21.” When the common-law Rule was developing, the possibility was recognized, strictly speaking, that one or more of A’s children might reach 21 more than 21 years after A’s death. The possibility existed because A’s wife (who might not be a life in being) might be pregnant when A died. If she was, and if the child was born viable a few months after A’s death, the child could not reach his or her 21st birthday within 21 years after A’s death. The device then invented to validate the interest of A’s children was to “extend” the allowable perpetuity period by tacking on a period of gestation, if needed. As a result, the common-law perpetuity period was comprised of three components: (1) a life in being (2) plus 21 years (3) plus a period of gestation, when needed. Today, thanks to sperm banks, frozen embryos, and even the possibility of artificially maintaining the body functions of a deceased pregnant woman long enough to develop the fetus to viability – advances in medical science unanticipated when the common-law Rule was in its developmental stages – having a pregnant wife at death is no longer the only way of having children after death. These medical developments, and undoubtedly others to come, make the mere addition of a period of gestation inadequate as a device to confer initial validity under Section 2-901(a)(1) on the interest of A’s children in the above example. The rule of subsection (d), however, does insure the initial validity of the children’s interest. Disregarding the possibility that children of A will be born after his death allows A to be the validating life. None of his children, under this assumption,
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can reach 21 more than 21 years after his death.
Note that subsection (d) subsumes not only the case of children conceived after death, but also the more conventional case of children in gestation at death. With subsection (d) in place, the third component of the common-law perpetuity period is unnecessary and has been jettisoned. The perpetuity period recognized in paragraph (1) of subsections (a), (b), and (c) has only two components: (1) a life in being (2) plus 21 years.
As to the legal status of conceived-after-death children, that question has not yet been resolved. For example, if in the above example A leaves sperm on deposit at a sperm bank and after A’s death a woman (A’s widow or another) becomes pregnant as a result of artificial insemination, the child or children produced thereby might not be included at all in the class gift. Cf. Restatement (Second) of Property (Donative Transfers) Introductory Note to Ch. 26 (1988). Without trying to predict how that question will be resolved in the future, the best way to handle the problem from the perpetuity perspective is the rule in subsection (d) requiring the possibility of post-death children to be disregarded.
Subsection (e)--Effect of Certain “Later-of” Type Language. Subsection (e) was added to the Uniform Statutory Rule in 1990. It primarily applies to a non-traditional type of “later of” clause (described below). Use of that type of clause might have produced unintended consequences, which are now rectified by the addition of subsection (e).
In general, perpetuity saving or termination clauses can be used in either of two ways. The predominant use of such clauses is as an override clause. That is, the clause is not an integral part of the dispositive terms of the trust, but operates independently of the dispositive terms; the clause provides that all interests must vest no later than at a specified time in the future, and sometimes also provides that the trust must then terminate, but only if any interest has not previously vested or if the trust has not previously terminated. The other use of such a clause is as an integral part of the dispositive terms of the trust; that is, the clause is the provision that directly regulates the duration of the trust. Traditional perpetuity saving or termination clauses do not use a “later of” approach; they mark off the maximum time of vesting or termination only by reference to a 21-year period following the death of the survivor of specified lives in being at the creation of the trust.
Subsection (e) applies to a non-traditional clause called a “later of” (or “longer of”) clause. Such a clause might provide that the maximum time of vesting or termination of any interest or trust must occur no later than the later of (A) 21 years after the death of the survivor of specified lives in being at the creation of the trust or (B) 90 years after the creation of the trust.
Under the Uniform Statutory Rule as originally promulgated, this type of “later of” clause would not achieve a “later of” result. If used as an override clause in conjunction with a trust whose terms were, by themselves, valid under the common-law rule against perpetuities (common-law Rule), the “later of” clause did no harm. The trust would be valid under the common-law Rule as codified in subsection (a)(1) because the clause itself would neither postpone the vesting of any interest nor extend the duration of the trust. But, if used either (1) as an override clause in conjunction with a trust whose terms were not valid under the common-law
Note that subsection (d) subsumes not only the case of children conceived after death, but also the more conventional case of children in gestation at death. With subsection (d) in place, the third component of the common-law perpetuity period is unnecessary and has been jettisoned. The perpetuity period recognized in paragraph (1) of subsections (a), (b), and (c) has only two components: (1) a life in being (2) plus 21 years.
As to the legal status of conceived-after-death children, that question has not yet been resolved. For example, if in the above example A leaves sperm on deposit at a sperm bank and after A’s death a woman (A’s widow or another) becomes pregnant as a result of artificial insemination, the child or children produced thereby might not be included at all in the class gift. Cf. Restatement (Second) of Property (Donative Transfers) Introductory Note to Ch. 26 (1988). Without trying to predict how that question will be resolved in the future, the best way to handle the problem from the perpetuity perspective is the rule in subsection (d) requiring the possibility of post-death children to be disregarded.
Subsection (e)--Effect of Certain “Later-of” Type Language. Subsection (e) was added to the Uniform Statutory Rule in 1990. It primarily applies to a non-traditional type of “later of” clause (described below). Use of that type of clause might have produced unintended consequences, which are now rectified by the addition of subsection (e).
In general, perpetuity saving or termination clauses can be used in either of two ways. The predominant use of such clauses is as an override clause. That is, the clause is not an integral part of the dispositive terms of the trust, but operates independently of the dispositive terms; the clause provides that all interests must vest no later than at a specified time in the future, and sometimes also provides that the trust must then terminate, but only if any interest has not previously vested or if the trust has not previously terminated. The other use of such a clause is as an integral part of the dispositive terms of the trust; that is, the clause is the provision that directly regulates the duration of the trust. Traditional perpetuity saving or termination clauses do not use a “later of” approach; they mark off the maximum time of vesting or termination only by reference to a 21-year period following the death of the survivor of specified lives in being at the creation of the trust.
Subsection (e) applies to a non-traditional clause called a “later of” (or “longer of”) clause. Such a clause might provide that the maximum time of vesting or termination of any interest or trust must occur no later than the later of (A) 21 years after the death of the survivor of specified lives in being at the creation of the trust or (B) 90 years after the creation of the trust.
Under the Uniform Statutory Rule as originally promulgated, this type of “later of” clause would not achieve a “later of” result. If used as an override clause in conjunction with a trust whose terms were, by themselves, valid under the common-law rule against perpetuities (common-law Rule), the “later of” clause did no harm. The trust would be valid under the common-law Rule as codified in subsection (a)(1) because the clause itself would neither postpone the vesting of any interest nor extend the duration of the trust. But, if used either (1) as an override clause in conjunction with a trust whose terms were not valid under the common-law
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Rule or (2) as the provision that directly regulated the duration of the trust, the “later of” clause
would not cure the perpetuity violation in case (1) and would create a perpetuity violation in case
(2). In neither case would the clause qualify the trust for validity at common law under
subsection (a)(1) because the clause would not guarantee that all interests will be certain to vest
or terminate no later than 21 years after the death of an individual then alive.3 In any given case,
90 years can turn out to be longer than the period produced by the specified-lives-in-being-plus-
21-years language.
Because the clause would fail to qualify the trust for validity under the common-law Rule of subsection (a)(1), the nonvested interests in the trust would be subject to the wait-and-see element of subsection (a)(2) and vulnerable to a reformation suit under Section 2-903. Under subsection (a)(2), an interest that is not valid at common law is invalid unless it actually vests or terminates within 90 years after its creation. Subsection (a)(2) does not grant such nonvested interests a permissible vesting period of either 90 years or a period of 21 years after the death of the survivor of specified lives in being. Subsection (a)(2) only grants such interests a period of 90 years in which to vest.
The operation of subsection (a), as outlined above, is also supported by perpetuity policy. If subsection (a) allowed a “later of” clause to achieve a “later of” result, it would authorize an improper use of the 90-year permissible vesting period of subsection (a)(2). The 90-year period of subsection (a)(2) is designed to approximate the period that, on average, would be produced by using actual lives in being plus 21 years. Because in any given case the period actually produced by lives in being plus 21 years can be shorter or longer than 90 years, an attempt to utilize a 90-year period in a “later of” clause improperly seeks to turn the 90-year average into a minimum.
Set against this background, the addition of subsection (e) is quite beneficial. Subsection (e) limits the effect of this type of “later of” language to 21 years after the death of the survivor of the specified lives, in effect transforming the clause into a traditional perpetuity saving/termination clause. By doing so, subsection (e) grants initial validity to the trust under the common-law Rule as codified in subsection (a)(1) and precludes a reformation suit under Section 2-903.
Note that subsection (e) covers variations of the “later of” clause described above, such as a clause that postpones vesting until the later of (A) 20 years after the death of the survivor of specified lives in being or (B) 89 years. Subsection (e) does not, however, apply to all dispositions that incorporate a “later of” approach. To come under subsection (e), the specified-
3 By substantial analogous authority, the specified-lives-in-being-plus-21-years prong of the “later of” clause under discussion is not sustained by the separability doctrine (described in Part H of the Comment to § 1 of the Uniform Statutory Rule Against Perpetuities). See, e.g., Restatement of Property § 376 comments e & f & illustration 3 (1944); Easton v. Hall, 323 Ill. 397, 154 N.E. 216 (1926); Thorne v. Continental Nat'l Bank & Trust Co., 305 Ill. App. 222, 27 N.E.2d 302 (1940). The inapplicability of the separability doctrine is also supported by perpetuity policy, as described in the text above.
Because the clause would fail to qualify the trust for validity under the common-law Rule of subsection (a)(1), the nonvested interests in the trust would be subject to the wait-and-see element of subsection (a)(2) and vulnerable to a reformation suit under Section 2-903. Under subsection (a)(2), an interest that is not valid at common law is invalid unless it actually vests or terminates within 90 years after its creation. Subsection (a)(2) does not grant such nonvested interests a permissible vesting period of either 90 years or a period of 21 years after the death of the survivor of specified lives in being. Subsection (a)(2) only grants such interests a period of 90 years in which to vest.
The operation of subsection (a), as outlined above, is also supported by perpetuity policy. If subsection (a) allowed a “later of” clause to achieve a “later of” result, it would authorize an improper use of the 90-year permissible vesting period of subsection (a)(2). The 90-year period of subsection (a)(2) is designed to approximate the period that, on average, would be produced by using actual lives in being plus 21 years. Because in any given case the period actually produced by lives in being plus 21 years can be shorter or longer than 90 years, an attempt to utilize a 90-year period in a “later of” clause improperly seeks to turn the 90-year average into a minimum.
Set against this background, the addition of subsection (e) is quite beneficial. Subsection (e) limits the effect of this type of “later of” language to 21 years after the death of the survivor of the specified lives, in effect transforming the clause into a traditional perpetuity saving/termination clause. By doing so, subsection (e) grants initial validity to the trust under the common-law Rule as codified in subsection (a)(1) and precludes a reformation suit under Section 2-903.
Note that subsection (e) covers variations of the “later of” clause described above, such as a clause that postpones vesting until the later of (A) 20 years after the death of the survivor of specified lives in being or (B) 89 years. Subsection (e) does not, however, apply to all dispositions that incorporate a “later of” approach. To come under subsection (e), the specified-
3 By substantial analogous authority, the specified-lives-in-being-plus-21-years prong of the “later of” clause under discussion is not sustained by the separability doctrine (described in Part H of the Comment to § 1 of the Uniform Statutory Rule Against Perpetuities). See, e.g., Restatement of Property § 376 comments e & f & illustration 3 (1944); Easton v. Hall, 323 Ill. 397, 154 N.E. 216 (1926); Thorne v. Continental Nat'l Bank & Trust Co., 305 Ill. App. 222, 27 N.E.2d 302 (1940). The inapplicability of the separability doctrine is also supported by perpetuity policy, as described in the text above.
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lives prong must include a tack-on period of up to 21 years. Without a tack-on period, a “later
of” disposition, unless valid at common-law comes under subsection (a)(2) and is given 90 years
in which to vest. An example would be a disposition that creates an interest that is to vest upon
“the later of the death of my widow or 30 years after my death.”
Coordination of the Federal Generation-skipping Transfer Tax with the Uniform Statutory Rule. In 1990, the Treasury Department announced a decision to coordinate the tax regulations under the “grandfathering” provisions of the federal generation-skipping transfer tax with the Uniform Statutory Rule. Letter from Michael J. Graetz, Deputy Assistant Secretary of the Treasury (Tax Policy), to Lawrence J. Bugge, President, National Conference of Commissioners on Uniform State Laws (Nov. 16, 1990) (hereinafter Treasury Letter).
Section 1433(b)(2) of the Tax Reform Act of 1986 generally exempts (“grandfathers”) trusts from the federal generation-skipping transfer tax that were irrevocable on September 25, 1985. This section adds, however, that the exemption shall apply “only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985.” The provisions of Section 1433(b)(2) were first implemented by Temp. Treas. Reg. § 26.2601-1, promulgated by T.D. 8187 on March 14, 1988. Insofar as the Uniform Statutory Rule is concerned, a key feature of that temporary regulation is the concept that the statutory reference to “corpus added to the trust after September 25, 1985” not only covers actual post-9/25/85 transfers of new property or corpus to a grandfathered trust but “constructive” additions as well. Under the temporary regulation as first promulgated, a “constructive” addition occurs if, after 9/25/85, the donee of a nongeneral power of appointment exercises that power “in a manner that may postpone or suspend the vesting, absolute ownership or power of alienation of an interest in property for a period, measured from the date of creation of the trust, extending beyond any life in being at the date of creation of the trust plus a period of 21 years. If a power is exercised by creating another power it will be deemed to be exercised to whatever extent the second power may be exercised.” Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(B)(2) (1988).
Because the Uniform Statutory Rule was promulgated in 1986 and applies only prospectively, any “grandfathered” trust would have become irrevocable prior to the enactment of USRAP in any state. Nevertheless, the second sentence of Section 2-905(a) extends USRAP’s wait-and-see approach to post-effective-date exercises of nongeneral powers even if the power itself was created prior to USRAP’s effective date. Consequently, a post-USRAP-effective-date exercise of a nongeneral power of appointment created in a “grandfathered” trust could come under the provisions of the Uniform Statutory Rule.
The literal wording, then, of Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(B)(2) (1988), as first promulgated, could have jeopardized the grandfathered status of an exempt trust if (1) the trust created a nongeneral power of appointment, (2) the donee exercised that nongeneral power, and (3) USRAP is the perpetuity law applicable to the donee’s exercise. This possibility arose not only because the donee’s exercise itself might come under the 90-year permissible vesting period of subsection (a)(2) if it otherwise violated the common-law Rule and hence was not validated under subsection (a)(1). The possibility also arose in a less obvious way if the donee’s exercise created another nongeneral power. The last sentence of the temporary regulation states that “if a power is exercised by creating another power it will be deemed to be exercised to
Coordination of the Federal Generation-skipping Transfer Tax with the Uniform Statutory Rule. In 1990, the Treasury Department announced a decision to coordinate the tax regulations under the “grandfathering” provisions of the federal generation-skipping transfer tax with the Uniform Statutory Rule. Letter from Michael J. Graetz, Deputy Assistant Secretary of the Treasury (Tax Policy), to Lawrence J. Bugge, President, National Conference of Commissioners on Uniform State Laws (Nov. 16, 1990) (hereinafter Treasury Letter).
Section 1433(b)(2) of the Tax Reform Act of 1986 generally exempts (“grandfathers”) trusts from the federal generation-skipping transfer tax that were irrevocable on September 25, 1985. This section adds, however, that the exemption shall apply “only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985.” The provisions of Section 1433(b)(2) were first implemented by Temp. Treas. Reg. § 26.2601-1, promulgated by T.D. 8187 on March 14, 1988. Insofar as the Uniform Statutory Rule is concerned, a key feature of that temporary regulation is the concept that the statutory reference to “corpus added to the trust after September 25, 1985” not only covers actual post-9/25/85 transfers of new property or corpus to a grandfathered trust but “constructive” additions as well. Under the temporary regulation as first promulgated, a “constructive” addition occurs if, after 9/25/85, the donee of a nongeneral power of appointment exercises that power “in a manner that may postpone or suspend the vesting, absolute ownership or power of alienation of an interest in property for a period, measured from the date of creation of the trust, extending beyond any life in being at the date of creation of the trust plus a period of 21 years. If a power is exercised by creating another power it will be deemed to be exercised to whatever extent the second power may be exercised.” Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(B)(2) (1988).
Because the Uniform Statutory Rule was promulgated in 1986 and applies only prospectively, any “grandfathered” trust would have become irrevocable prior to the enactment of USRAP in any state. Nevertheless, the second sentence of Section 2-905(a) extends USRAP’s wait-and-see approach to post-effective-date exercises of nongeneral powers even if the power itself was created prior to USRAP’s effective date. Consequently, a post-USRAP-effective-date exercise of a nongeneral power of appointment created in a “grandfathered” trust could come under the provisions of the Uniform Statutory Rule.
The literal wording, then, of Temp. Treas. Reg. § 26.2601-1(b)(1)(v)(B)(2) (1988), as first promulgated, could have jeopardized the grandfathered status of an exempt trust if (1) the trust created a nongeneral power of appointment, (2) the donee exercised that nongeneral power, and (3) USRAP is the perpetuity law applicable to the donee’s exercise. This possibility arose not only because the donee’s exercise itself might come under the 90-year permissible vesting period of subsection (a)(2) if it otherwise violated the common-law Rule and hence was not validated under subsection (a)(1). The possibility also arose in a less obvious way if the donee’s exercise created another nongeneral power. The last sentence of the temporary regulation states that “if a power is exercised by creating another power it will be deemed to be exercised to
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whatever extent the second power may be exercised.”
In late March 1990, the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the Joint Editorial Board for the Uniform Probate Code (JEB-UPC) filed a formal request with the Treasury Department asking that measures be taken to coordinate the regulation with USRAP. By the Treasury Letter referred to above, the Treasury Department responded by stating that it “will amend the temporary regulations to accommodate the 90-year period under USRAP as originally promulgated [in 1986] or as amended [in 1990 by the addition of subsection (e)].” This should effectively remove the possibility of loss of grandfathered status under the Uniform Statutory Rule merely because the donee of a nongeneral power created in a grandfathered trust inadvertently exercises that power in violation of the common-law Rule or merely because the donee exercises that power by creating a second nongeneral power that might, in the future, be inadvertently exercised in violation of the common-law Rule.
The Treasury Letter states, however, that any effort by the donee of a nongeneral power in a grandfathered trust to obtain a “later of” specified-lives-in-being-plus-21-years or 90-years approach will be treated as a constructive addition, unless that effort is nullified by state law. As explained above, the Uniform Statutory Rule, as originally promulgated in 1986 or as amended in 1990 by the addition of subsection (e), nullifies any direct effort to obtain a “later of” approach by the use of a “later of” clause.
The Treasury Letter states that an indirect effort to obtain a “later of” approach would also be treated as a constructive addition that would bring grandfathered status to an end, unless the attempt to obtain the later-of approach is nullified by state law. The Treasury Letter indicates that an indirect effort to obtain a “later of” approach could arise if the donee of a nongeneral power successfully attempts to prolong the duration of a grandfathered trust by switching from a specified-lives-in-being-plus-21-years perpetuity period to a 90-year perpetuity period, or vice versa. Donees of nongeneral powers in grandfathered trusts would therefore be well advised to resist any temptation to wait until it becomes clear or reasonably predictable which perpetuity period will be longer and then make a switch to the longer period if the governing instrument creating the power utilized the shorter period. No such attempted switch and no constructive addition will occur if in each instance a traditional specified-lives-in-being-plus-21-years perpetuity saving clause is used.
Any such attempted switch is likely in any event to be nullified by state law and, if so, the attempted switch will not be treated as a constructive addition. For example, suppose that the original grandfathered trust contained a standard perpetuity saving clause declaring that all interests in the trust must vest no later than 21 years after the death of the survivor of specified lives in being. In exercising a nongeneral power created in that trust, any indirect effort by the donee to obtain a “later of” approach by adopting a 90-year perpetuity saving clause will likely be nullified by subsection (e). If that exercise occurs at a time when it has become clear or reasonably predictable that the 90-year period will prove longer, the donee’s exercise would constitute language in a governing instrument that seeks to operate in effect to postpone the vesting of any interest until the later of the specified-lives-in-being-plus-21-years period or 90 years. Under subsection (e), “that language is inoperative to the extent it produces a period of time that exceeds 21 years after the death of the survivor of the specified lives.”
In late March 1990, the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the Joint Editorial Board for the Uniform Probate Code (JEB-UPC) filed a formal request with the Treasury Department asking that measures be taken to coordinate the regulation with USRAP. By the Treasury Letter referred to above, the Treasury Department responded by stating that it “will amend the temporary regulations to accommodate the 90-year period under USRAP as originally promulgated [in 1986] or as amended [in 1990 by the addition of subsection (e)].” This should effectively remove the possibility of loss of grandfathered status under the Uniform Statutory Rule merely because the donee of a nongeneral power created in a grandfathered trust inadvertently exercises that power in violation of the common-law Rule or merely because the donee exercises that power by creating a second nongeneral power that might, in the future, be inadvertently exercised in violation of the common-law Rule.
The Treasury Letter states, however, that any effort by the donee of a nongeneral power in a grandfathered trust to obtain a “later of” specified-lives-in-being-plus-21-years or 90-years approach will be treated as a constructive addition, unless that effort is nullified by state law. As explained above, the Uniform Statutory Rule, as originally promulgated in 1986 or as amended in 1990 by the addition of subsection (e), nullifies any direct effort to obtain a “later of” approach by the use of a “later of” clause.
The Treasury Letter states that an indirect effort to obtain a “later of” approach would also be treated as a constructive addition that would bring grandfathered status to an end, unless the attempt to obtain the later-of approach is nullified by state law. The Treasury Letter indicates that an indirect effort to obtain a “later of” approach could arise if the donee of a nongeneral power successfully attempts to prolong the duration of a grandfathered trust by switching from a specified-lives-in-being-plus-21-years perpetuity period to a 90-year perpetuity period, or vice versa. Donees of nongeneral powers in grandfathered trusts would therefore be well advised to resist any temptation to wait until it becomes clear or reasonably predictable which perpetuity period will be longer and then make a switch to the longer period if the governing instrument creating the power utilized the shorter period. No such attempted switch and no constructive addition will occur if in each instance a traditional specified-lives-in-being-plus-21-years perpetuity saving clause is used.
Any such attempted switch is likely in any event to be nullified by state law and, if so, the attempted switch will not be treated as a constructive addition. For example, suppose that the original grandfathered trust contained a standard perpetuity saving clause declaring that all interests in the trust must vest no later than 21 years after the death of the survivor of specified lives in being. In exercising a nongeneral power created in that trust, any indirect effort by the donee to obtain a “later of” approach by adopting a 90-year perpetuity saving clause will likely be nullified by subsection (e). If that exercise occurs at a time when it has become clear or reasonably predictable that the 90-year period will prove longer, the donee’s exercise would constitute language in a governing instrument that seeks to operate in effect to postpone the vesting of any interest until the later of the specified-lives-in-being-plus-21-years period or 90 years. Under subsection (e), “that language is inoperative to the extent it produces a period of time that exceeds 21 years after the death of the survivor of the specified lives.”
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Quite apart from subsection (e), the relation-back doctrine generally recognized in the
exercise of nongeneral powers stands as a doctrine that could potentially be invoked to nullify an
attempted switch from one perpetuity period to the other perpetuity period. Under that doctrine,
interests created by the exercise of a nongeneral power are considered created by the donor of
that power. See, e.g., Restatement (Second) of Property, Donative Transfers § 11.1 comment b
(1986). As such, the maximum vesting period applicable to interests created by the exercise of a
nongeneral power would apparently be covered by the perpetuity saving clause in the document
that created the power, notwithstanding any different period the donee purports to adopt.
Reference. Section 2-901 is Section 1 of the Uniform Statutory Rule Against Perpetuities (Uniform Act). For further discussion of this section, with numerous examples illustrating its application, see the Official Comment to Section 1 of the Uniform Act.
Reference. Section 2-901 is Section 1 of the Uniform Statutory Rule Against Perpetuities (Uniform Act). For further discussion of this section, with numerous examples illustrating its application, see the Official Comment to Section 1 of the Uniform Act.
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