What We Leave Behind: Legacies and The Law of Wills - Part 2: The Rule Against Perpetuities
The following is a rough transcript of this podcast episode together with sources imbedded as links:
My name is Nathan Green, and I am a practicing lawyer.
This podcast is the second in a multi-part series on the law of wills. In the previous podcast we explored the history of will law and discussed just how influential it is to modern society and how important it is to social justice. This podcast is going to be about the single most important will rule, the rule against perpetuities. If you didn’t listen to the first part in this series you might want to as it provides important background and context. However if you are only interested in hearing my take on the Rule against perpetuities and want to start here, I obviously can’t stop you.
Take a moment and imagine that you are a client of some bigshot lawyer, sitting in his office downtown. The walls are mahogany, the conference table, imported teak, leather bound volumes of law texts cover the walls, your chairs made of leather that is a hundred years old, and you are looking down on the city before you, no other building rivaling this one for height or position. You are eighty five years old and worth three billion dollars which you made in the rail road business brutally squeezing out your competition, supressing unions, and taking land from any farmer who was so unlucky as to be on or near the path of your railroad. In short you are one of the few masters of the universe and in your life your every desire had simply to be spoken to be acquired – freely or otherwise.
Except one. Last week your arm was tingling when you woke up and the doctors tell you that you have a heart condition, your days are numbered, another year at best.
All your life you have had a hunger for more. More money, more power, more importance, respect, renown. You have never been satisfied with what you had of anything, or anyone as your recently divorced seventh wife ought to have realized. And, of course, your children have also failed to live up to your expectations. Your eldest son has no head for business and is only interested in artistic pursuits, your daughter married for love, some liberal intellectual who would probably give your fortune to the poor if ever given the chance. And your youngest no longer speaks to you due to your overbearing personality (though of course you phrase it as her weakness of constitution and willingness to accept mediocrity).
Put yourself in this person’s place and ask yourself “How can you continue your legacy? How can you keep control, power, after you die? How are you going to immortalize yourself?” Because that is exactly what the meeting you are having with your lawyer is about. Immortalizing yourself.
There are a lot of answers to that question – how can we be remembered – and we are going to talk about them. But just intuitively because of how the question is phrased you probably realize whatever this billionaire decides, is probably a bad idea for society to allow. This person built his railroads, made his money, and now his time is coming to an end, as it should.
Imagine what today’s world would be like if the great men of two hundred years ago were still influencing affairs now without the benefit of modern knowledge and evolved thinking.
It is the rule against perpetuities that is going to foil the vast majority of his plans. Now, it is important for you to remember, in the event you are a malicious billionaire or not, that regardless of anything else this podcast is, This is not legal advice.
----
Disclaimer
This is not legal advice
The information here in any form is for entertainment purposes only.
You should not rely on or take or fail to take any action based upon this information.
Never disregard professional legal advice or delay in seeking legal advice because of something you heard here.
This is not legal advice.
This is not legal advice.
----
The Rule Against Perpetuities
A Perpetuity comes from the same root as the work perpetual, never ending. It is the single most important rule ever written for social equity. It is more important than laws prohibiting slavery. It is more important than freedom of expression, or the right to vote and elect leaders. And it is not codified in any constitution, it is a simple common law rule, and in some jurisdictions a legislated one.
So what is the rule? Every jurisdiction is a little different for the timing, but the jist is that you have to give away all your property, without any strings attached, within 100 years of your death.
What if, inspired by this podcast, you figure out a way around the rule then and you spend the rest of your life working hard and save up a million bucks to try and turn into a perpetuity. If you are reasonably smart, lucky, and hard working in life, did well for yourself, then this is a sum of money that hundreds of thousands of people have today. It is realistically attainable in return for a life spent in its acquisition. So, instead of just giving this money to your children, you set up a perpetuity. You create a company, trust, something that sits on this million dollars while it racks up interest at 10% a year. If you wanted to sit on that money until it was as much as the United State’s entire GDP how long would that take? US GDP is 53 Trillion Dollars. How long would that take to go from 1 million to 53 trillion? 179 years. Think about that. The only thing stopping some megalomaniac from having as much money as the United States annual economy is 179 years and a common law rule.
By waiting 179 years you would have enough money to, easily, build a military larger and more modern than the USA’s. You would have enough money to conquer the planet. With planning today your great, great, grandson could be ruler of earth. Or you could program a computer to rule, or write a will with detailed instructions, to do what you would have in certain situations. Imagine if the ghost of a man from the mid 1800’s were ruling a significant part of the planet today simply by virtue of having acquired a relatively modest sum of money and setting up a perpetuity.
If the idea terrifies you, you are right to be afraid. You might also be thinking that even without this rule, what is to stop someone’s descendants from just following this plan?
You are going to get an answer to that question in just a moment. But before we do a side note is needed. If you are a lawyer and your listening to this podcast you are probably grinding your teeth in anger that I have glossed over the topic of the rule against accumulations. The rule against accumulations is very similar to the rule against perpetuities but it prohibits estate money from being in an investment for more than a certain period of time. Imagine I wanted to describe the mona lisa to you. If I described her smile, and the mischievous look in her eyes I would think I had done a pretty good job. However some people would be unhappy that I didn’t describe her clothes. Some people would be upset I didn’t describe the background. Others would want to know about the experience of seeing the Mona Lisa and want me to describe the louvre, the museum where it is held, the crowds, the security glass, and some people who have different cultural norms about smiling or male//female interactions, might take something different from the painting than I do and be upset that I have mischaracterized it. The law is like that. Every country’s rules are a bit different, countries might have different names for these legal principles or accomplish them in different ways, there might be certain exceptions, twists, enhancements that are very relevant to you in your jurisdiction that don’t exist in mine – or that do exist in mine but I don’t think they are important to describing the core of the concept. That is just one, of many, reasons why you shouldn’t take this podcast as legal advice.
So, earlier we asked “isn’t the way around the rule against perpetuities just for your descendants to be prudent with the family fortune? Why don’t they just do that and take over the world?” The answer to that question is lazy, good for nothing, silver spoon, trust fund jerks.
Literally the world is being constantly saved by the fact that when you take a child, and give them a fortune with no strings attached, they will drink it, snort it, and whore it away. The statistics are that inherited wealth is lost by the second generation 70% percent of the time, and lost by the third generation 90% of the time (with 97% of family businesses folding by the third generation). It doesn’t take long before money, or business, passes into the hands of an idiot who wastes it. Business savvy is, thankfully, not a genetic trait. Who knows, maybe the hunger that drives the highly successful is genetic and the unlimited appetites of future generations would have been turned to productive uses had they not simply been given money.
Now in fairness to the rich, trust fund, silver spooned, kids out there, a lot of the time money is simply diluted as opposed to squandered. Imagine Bill Gates and his 100 Billion bucks. Bill has has three kids, who each eventually have three kids who each have three kids. Bill Gates could well be alive to see his family have 120 members. If he divided his fortune equally between them none of them would even be billionaires.
For one, or several, of many reasons when money passes down it generally gets redistributed into the economy, it does not get held, saved, and used for some grandiose power play. It does not get placed into the hands of someone remarkable enough to make good use of it… generally.
There is one example of what happens when you take vast power, concentrate it, and put it into the hands of a remarkable person. His name was Alexander the third of Macedonia, Alexander the Great. Alexander inherited his father’s kingdom at the age of 20, and in the following thirteen years until he died he conquered the known world.
The rule against perpetuities wouldn’t stop an alexander, it is simple statistical chance that prevents that, but without the rule against perpetuities you could vastly improve the odds by setting up a will in such a way that a fortune sits, waits, and grows, waiting until there is an individual born into the family, a remarkable individual like Alexander, and finally delivering unto him a centuries old fortune for him to unleash on the world.
Depending on where you are, the rule against perpetuities is going to have a different time limit. In some countries it is just a stop watch from the date you die, in old English law it was the lifetime of someone named in the will plus 21 years (and people would often name members of the royal family in their will as they were notoriously long lived). Why allow people so much time? The rule isn’t just that you have to give the money, it is that all the strings with the money have to come off. There are some legitimate situations where you want to keep strings on money for the long term. Imagine you have a disabled son and the plan is to set up a trust for the life of your son, and then if he has any children, they inherit when they turn 21. So if your son, at 85, has a kid, you are covered.
And this is an important point and part of the reason this rule is so successful at operating under the radar – it is very limited in its scope. Concerned that your disabled son could have a child that needs special care? No problem we can draft a will to protect you from that massively unlikely situation. An ordinary person with ordinary concerns is never even going to hear about this rule. Even for the super-rich so long as their estate objectives fall in line with ordinary social values we will let them do their thing.
You recall earlier we talked about it taking just 179 years to get the US GDP’s worth of money? Well with the miracle of compound interest most of that growth is just in the last ten years. In one hundred years the million bucks would only have grown to 13 billion. That’s a lot, but not enough to get into trouble with from a systemic perspective. The state isn’t threatened by that kind of wealth. An Alexander might be able to turn that much money into a massive business empire, but he couldn’t buy aircraft carriers or ballistic missile submarines with it.
But there are down-sides to this rule as well, and exceptions designed to fit social objectives. Today for example the biggest Ontario exception to the rule against perpetuities has to do with environmental protection covenants. You can, in death, take a large piece of land and turn it into a park giving title to the government but restricting the property’s use to a conservation area/park forever. Its more complex than that of course, but the idea is that we like the environment today and so we allow an exemption.
I also understand that some US jurisdictions permit and require cemeteries to take money from the people who are buried to be held in a perpetuity trust to be used to pay for the care of their grave sites.
One imagines that in the middle ages there would have been a way to dedicate your property to the church as a perpetuity to be used to forever perform upkeep on a church you had paid to be made and be buried in.
People have been trying to find ways around this rule for a long time, most are invalid, and even ones that seemed to be based on good law when they were attempted eventually became obviously unenforceable.
For example in the mid 1900’s in the USA there was a great social shift with the civil rights movement. Whites quickly realized that racial integration was coming their way unless they could find a way to stop it. So there were attempts to use restrictive covenants placed on land to prevent minorities from moving into a neighborhood in perpetuity. The typical restriction would basically read that a piece of land could not be owned by a black person, a jew, or a chinaman. Now you don’t need to know anything about law to know that there probably are not many courts left in the western world that will uphold a provision like that. Whether the court strikes down the restriction for illegality, or perhaps even says “yes it was violated and yes it is valid, so here is a single penny in damages – you racist bastard”. You are probably not going to be able to get the jewish family that moved in across the street thrown out. And if you do, you can probably expect legislation to follow rapidly to prohibit it from happening again and giving the house back to the evicted family.
So lets turn our mind back to the Billionaire we used as an exemplar of someone we do not want to be able to set up a perpetuity. What might this person want to do with his fortune if not leave it to his children?
Could he set up an excaliber trust? The idea being that the money sits in some trust, untouchable until a direct descendant of the billionaire’s passes some kind of test. The first relative to make 100 million independently. The first relative to be ruthless enough. The first relative to pass some sort of political purity test? That would violate the rule against perpetuities as it could take hundreds of years for the test to be passed. What if the billionaire set up some kind of dead stick entity? We imagined a railroad baron so imagine his will said that his three billion fortune was to be invested forever and each year the interest it made was to be used to purchase as much railroad line as it could and the revenues from that line going back into the billions. Prohibited. What if he tried to donate it to politicians over the ages on the condition that they shared his politics? Suddenly any politician that adopted the position that America should be a global empire and conquer the planet would have essentially unlimited campaign finances? Prohibited. Imagine that he gritted his teeth and decided to leave it all to his disappointment of a son, on the condition that the sun spend no more than 100,000 a year on himself and he use the rest for business enterprises? Again, the rule against perpetuities is going to significantly limit that plan as long term the gift must be given fully without any strings.
What if he wanted to set up some kind of dead-stick trust, corporation, or charity where the money was managed according to a specific set of rules? Well once he dies and the charity, trust, whatever is established, it falls on the trustees to manage it and make decision. No matter what you do, there is always going to be a way for the organization to pervert your intentions so long as you are not there to actively object.
And by the way excaliber trust and dead stick trusts are not legal terms, just something I thought up as a way to illustrate the idea.
So lets talk about our billionaire. You remember the classic story a Christmas carol where three ghosts, one being Christmas future visit scrooge? Well imagine we took an English billionaire from the 1800’s and showed him a glimpse of today. What might he do if he could see today? This old white man might take issue with homosexuals, women voting, interracial marriage, the demise of horse cavalry in the military, the lack of a mandatory draft, the decline of the British empire. Imagine there was some kind of well-funded organization today that was, and had for two hundred years, been pushing to keep inter-racial marriage illegal. Or an organization with nearly limitless resources hiring mercenaries to put down revolts against the British empire in its colonies. Though before we write these off as impossibly evil, what if a billionaire today set up an organization like this to push against Trans-rights? Plausible isn’t it? What about a billionaire who setting up a perpetuity to try and make sure that tank grown meat and vaccinations were prohibited? It’s easy to imagine some kind of anti-technology billionaire trying to stop the march of certain areas that take us away from the “natural life”.
Diluting the value of an estate
So to circle back to my first podcast. My theory is that the law of wills was originally created to help kings preserve the kingdom forever. The specific intention was to create perpetual kingdoms that would go out and conquer the world. Isn’t it interesting that Will law had its origins in people concerned with preserving power but the current system is carefully set up to prevent people from accumulating power in their family. And of course the side effect of that was that huge fortunes are redistributed to society relatively quickly as they get placed in the hands of future generations either diluting the money or seeing it squandered by descendants who are not as competent as the head of the family.
Things get even more interesting in terms of your family obligations in a will. If I asked you right now what your will should say, the vast majority of people would say that they will leave everything to their spouse and then if their spouse died before them, divide everything equally between their kids. Instead of concentrating money to preserve power, the vast majority of people dilute it to be fair between all their kids.
You can actually visually see the proof of this. The next time you are on a plane flying over an older, rural, area look out the window at the fence lines. What you will see if that almost every lot is a rectangular strip of land with its narrow edge touching on a road (so the farmer working the land can bring the crops to the road without crossing onto someone else’s land. Well historically the government didn’t always go out and make those long narrow lots - sometimes they did depending on where. But when you see every lot is a different width, that's generally from people dividing their lots among their kids, again and again and again, that resulted in those long narrow and irregular rectangles of property.
The rich however historically, very much wanted to avoid doing this. They, generally, understood that money was power, and by dividing their property they were dividing the family power. The king wanted one, and only one, heir, and if you were not it… well good luck.
Philosophical question: is there such a thing as human nature? Are there things we innately think of as fair or unfair that are not created by culture, experience, upbringing?
Let’s say your father was fabulously wealthy and he died leaving everything to your elder brother. You, your sister, and your mother were totally disinherited. How would you feel about that? How would the courts deal with that problem?
This is a loaded question because it assumes there is a problem. Certainly you, being disinherited, wouldn’t be happy about the situation. But should an outsider be concerned with it? We, meaning both society and us as people, don’t want some poor widow out on the streets because her rich husband had the misfortune to die. It would be nice if he had left something for her, and it would be nice that if he didn’t, there was a way to make him.
There is an expression among lawyers “tough cases make bad laws”. You have to appreciate that with something as common as wills every single year there are literally hundreds of people trying to disinherit their wives, children, etc. It might take a few years but eventually there is going to be a case that is so outrageous, everyone agrees that the right outcome differs from the legal outcome. Maybe there is a millionaire who has two children by two different wives and he dies just after the second child is born. The first child is a son who, at 18, started his own company and is now independently wealthy, the other child was born just before the man’s death. The child is severely disabled and is going to need care for the rest of her life, the widow was also significantly hurt during child birth and is now also disabled. The rich son, the widow’s step son, hates his step-mother and disabled sister and the husband/father’s will was made just after the rich son was born and leaves him everything. The father had no opportunity to “fix” his will to account for his new wife’s disability, the disability of his new daughter, the success of his son, or the breakdown in the relationship between son and widow.
In fact a huge amount of will litigation happens in situations where the wife was not the biological mother of the children. Mostly the litigation happens where the children object to their step mother inheriting and them not. Bitter pill to swallow if she is a fairly new wife and you don’t really consider her family, yet she gets your inheritance.
Should the court “fix” the will in that case? The judge, with the stroke of a pen could.
There is a real question about what the jobs of the courts are. Are they supposed to interpret the law, or are they supposed to create laws to address social issues, and make the judge feel good about the outcome of the cases before him?
Now regardless of what the courts should do, I don’t think you can look at the history of what happened here and deny that what they actually did do was based not on interpreting the law as written, but rather trying to act “fairly” as they saw it.
Which is actually a philosophically interesting outcome because these judges were part of the society and culture at the time they made these rulings, it is hard to think of a judge of 1800s England as anything other than the ultimate insider. Yet they seemed to rebel against certain outcomes which we still would recognise as being manifestly unfair.
It is probably futile to ask that you try and put yourself in the mind of a judge from the 1800’s you don’t have the wig for a start, but try to Put yourself in the shoes of a modern judge. You are smart, respected, powerful, and you don’t want to see a child, maybe a disabled child, totally disinherited. But you are supposed to simply be an administrator of the law. What do you do? How can you change a will without changing a will? Technicalities – which in the law of wills are called “formalities”.
So far as I can tell the oldest formality that I still hear about in my practice, is an old roman rule that a will must provide for every child and wife of the deceased. Some roman had the bright idea (probably given to him by the lawyer for the widow or children), that totally omitting a child from any kind of gift was a sign of mental illness – the deceased must have forgotten about the omitted child, not made a deliberate decision to ignore them . Thus he was not of sound mind and thus the will was invalid, and thus he died without a will and thus everyone got a share of his estate.
This led to people giving a single dollar to each of their children if you wanted to disinherit them.
The obvious counter argument to all this is “Look, I feel bad for them, but it was his money, he gets to do what he wants.” The thing about the history of law in this area though is that there is an emotionally impossible situation for every value set.
So here is another example. In England, before the Married Woman’s Property act of 1870, a woman lost her legal individuality when she married. So lets say a 20 year old woman who’s parents had left her a significant sum to live on, married a 30 year old man, they spent the next year happily married, and then the husband dies suddenly, and his will, says that the husband’s parents, or his brother, get everything. The wife would lose all the money she brought into the marriage and she would be destitute for the mistake of having fallen in love.
If you were a judge and that case was in front of you, wouldn’t you be taking a very, very careful look at that will and asking questions like “Was this will witnessed properly? Did the witness actually see the signature being made? Perhaps the act of getting married, and combining your legal personhood with your wife, should invalidate the pre-marriage will, after all the married couple is a new legal being. And a dozen other questions that some lawyer dreamed up at 2 am worrying himself into an ulcer over the poor widow he was representing who was going to lose it all.
Now it isn’t actually a free for all when it comes to wills. England had laws requiring certain people such as wives to be provided for in some minimum amount, and our current law in Ontario provides that a dependant can make a claim against the estate if the gift in the will is inadequate to care for them. But there were, and are, never the less always tough cases where simply following the will just seems unfair to our sensibilities.
And you are going to ask these questions with more and more vigour when someone is attempting to do something you dislike, such as set up a perpetuity, concentrate wealth to the harm of others, or otherwise do something socially destructive.
On the other hand wills are uniquely powerful. A Swedish chemical engineer, Alfred, invented dynamite and made a fortune selling this compound, killing untold numbers in the process. When he died he wanted to make sure he wasn’t remembered as the father of destruction, but instead as someone who contributed positively to the world. So he set up a society, put a fortune into it, and gave it a simple mission of helping mankind. Now that Swedish chemical engineer, Alfred Nobel, isn’t thought of as the man who invented dynamite, he is remembered as the founder of the nobel prize.
Should we have a rule of law which prohibited him from doing this?
Is it even possible to have a law, a true law that is known in advance and predictable and can be relied on, when there is such variety in what people might do? A will is a unique document in law because there can be no consequences for the person who made it. No matter what you put in your will you can’t get dirty looks from your family for it, you can’t be charged with a crime for it, you can’t lose money and have to pay damages – your estate could, but you, you are dead by the time any of that stuff happens.
Immortality looks much more desirable to those of us who are about to die, than to those of us who remain and have to deal with an immortal jerk.
And maybe that is truly the most important rule in wills, not the intention of the testator, but the priorities of the society that has to live with the will.
In the next podcast we are going to talk about Social Policy and how these cases, where there was a clear moral need to change the law, in fact helped to shape the law we have in ways that were both good, and bad.
I hope you enjoyed today’s podcast and while I have tried to give you a solid overview of the rule against perpetuities it is important to know that every country, every jurisdiction, is going to have its own rules. So please, more than anything else, remember that THIS is not legal advice.