A Little Known Practice Used By Estate Planners Leans on Queen Elizabeth II in a Fascinating Way
Here’s an interesting thought experiment: Think of a family that exists today—any family in the world—where in 2122, someone can quickly discover which family members are alive and which ones have passed.
What kind of family might this be? Certainly a family well-known globally. A family where every member’s birth and death are carefully recorded. A family where every member has their own Wikipedia entry (or whatever the Wikipedia equivalent is in 2122) and whose comings and goings are considered newsworthy.
If you thought: “Aha! The British Royal Family,” you came to the same conclusion as many estate planning attorneys. Queen Elizabeth II (and her descendants) are sometimes written into trust agreements even though they have nothing to do with the trust. This is because of what’s known as the Rule Against Perpetuities (RAP), which is essential to how trusts operate.
What is the Rule Against Perpetuities (RAP)?
The RAP prevents assets from being held forever in a trust. The idea (derived first in England, where land is at a premium) is that it’s bad for people to tie up valuable assets, particularly real estate, in old, stuffy, or inflexible trusts forever. So, at some point, regardless of what’s happening with the family of the trust creator (“trustor”), beneficiaries, or the trustees, the law forces the trust to end and the assets to come out of it.
But what should that point in time be? After all, it’s a bit of an arbitrary endpoint. The traditional, common law RAP establishes a benchmark, which requires finding one “life in being” at the time the trust interests become “vested” (i.e., tied up in trust) and then forcing all assets to come out 21 years after that life in being ends. In other words, that’s when your trust becomes irrevocable, and all assets tied up are subject to the provisions of your trust. From the time your trust becomes irrevocable (e.g., is created), the RAP clock starts ticking. To ensure your trust stays valid as long as possible, you want to find someone alive at that time the trust becomes irrevocable and end the trust 21 years after that person dies.
Practically, this allows trusts to last about 100 years because you usually pick someone really young to be the “life in being,” then add 21 years. For example, if you create an irrevocable trust today, you might pick a baby you know to be the “life in being” for your trust. With today’s life expectancy, that baby is expected to live about 80 years. Add 21 years to that, and you would have a trust that could last 101 years. However, suppose you pick someone that maybe your trustees don’t know, and they need to track them down. Wouldn’t it be easier to select someone everyone knows now and will likely know 100 years in the future?
Here is where Queen Elizabeth II and the British Royal Family come in. Because this measuring life (i.e., the benchmark person) can be anyone alive when the trust is created, Queen Elizabeth and her descendants are sometimes used by estate planners as the measuring lives because they are so universally known. The identity of her descendants, and their dates of birth and death, can be easily found today and will be easily found in 100 years.
So, for example, suppose you did want to select a member of the Royal Family to be your “life in being,” you might want to consider someone like Queen Elizabeth’s great-granddaughter, Lilibet, the daughter of Prince Harry and Meghan Markle. Given that Lilibet is only 1-year-old today, your assets could safely stay in your trust for nearly a hundred years.
The Wealth.com Approach
In case you are curious, the Wealth trust follows a more modern drafting philosophy and does not mention Queen Elizabeth or the Royal Family. Instead, if the traditional RAP is relevant, the Wealth trust references the family members of the person who created the trust (“trustor”), starting with the trustor’s generation. Thus, it includes the trustor’s siblings, children, grandchildren, nieces, and nephews.
A trust created under this Trust Agreement must terminate on the last day before an interest in property must vest or be distributed under applicable law. If this last day is determined in reference to a life in being, that last day will be the day that is twenty-one (21) years after the death of the last to die of all of the descendants of the trustor’s parents who are living at the date of the trustor’s death. The trustee of a trust that is being terminated under this paragraph must distribute the trust property to the primary beneficiary of that trust.
^Sample text from a Wealth Trust