ACCUMULATION-SEC17-TRANSFER OF PROPERTY
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ACCUMULATION SEC17...
Description
DOCTRINE OF ACCUMULA ACCUMUL ATION
INTRODUCTION A property owner is thinking of making a will or creating creating a trust. How far into
the future should the law allow him or her to reach when tying up that property? property? Can he or she control the devolution of that property indefinitely? For a lifetime? For a fixed period of years? How far should one generation be given freedom to dispose of property in ways that will restrict the freedom of the next? These fundamental uestions! which are the substance to be analysed ! are ancient ones! and different answers have been given to them at different times. The "ule Against #erpetuities 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 accumulate and retain income in trust to the applicable perpetuities period. $n the typical case! compliance with the "ule Against #erpetuities #erpetuities ensures compliance compliance with the rule against against accumulations accumulations.. Hence! Hence! for %&& years! the rule against accumulation! the "ule Against #erpetuities. 'ith 'ith the erosion of the "ule Against Against #erpetuities #erpetuities!! however! however! the rule against accumulations of income may have newfound relevance. #erpetual trusts are more likely than ordinary ordinary trusts to prescribe prescribe accumulatio accumulations ns of income! and such trusts are designed to endure beyond the traditional perpetuities period of lives in being plus twenty(one years. $ncome from trust assets must either be distributed! retained as income or accumulated.$f it is accumulated it becomes additional capital of the trust! in turn )usually* generating future income. $t has long been accepted that the rule restricting accumulation! and particularly the restriction on the period for which income may lawfully lawfully be accumulated! accumulated! is an important aspect of trust administration administration and law! law! with potentially serious conseuences for any breach. However! until the Accumulations Act +,&&! +,&&! the law in this area area barely barely seems to have been been the sub-ect sub-ect of note or litigation. uestions relating to accumulations! to the extent that they ever arose! were simply considered under the umbrella of the wider uestion of whether the trust itself
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was lawful. $n /nglish law! this almost invariably involved consideration of what has become known as the rule against perpetuities. 'e were told that the rule against against excessive excessive accumulation accumulationss works a similar similar misc mischi hief ef in rela relati tion on to trus trusts ts.. $t long long pred predat ates es the the emer emerge genc ncee of the the mo mode dern rn discretionary trust! in which powers to accumulate are an important element. The reasonable reasonable wishes of settlors will often be incapable of fulfilment fulfilment or will run the risk of being defeated by an absolute rule that cannot be side(stepped. THE MEANING MEA NING OF AN “ACCUMULATION” For the purpose purposess of the rule! rule! the meaning meaning of the term term 0accum 0accumula ulation tion11 is Earl of Be Berk rkel eley ey! Harm toler tolerab ably ly clea clearr. $n the lead leading ing mo mode dern rn case case!! Re Earl Harman an 23
expressed the view that4 Accu Accumu mula lat to! o! to my m!" m!" !#o !#ol# l#e$ e$ t%e t%e a"" a""t to! o! of !co !come me to ca& ca&ta tall t%u$ t%u$ !crea$!' !crea$!' t%e e$tate ! fa#our of t%o$e e!ttle" to ca&tal a!" a'a!$t t%e !tere$t$ of t%o$e e!ttle" to !come . 'here income was retained to meet potential obligations or liabilities! it did not lose its character as income! and had to be applied as such to the extent that it was not in fact needed. Thus there is no 0accumulation1 where4 )+* a fund is charged with the payment of annuities and income is retained as a precaution against future deficiencies5 or )%* money is retained against against possible liabilities under a lease! for example in relation to repairs DIRECTION FOR FO R ACCUMULATION ACCUMULATION 6ection +7 of the Act speaks about the 0Accumulation of $ncome of property or
8irection for Accumulation1. A direction for the accumulation of income of property amounts to limiting the beneficial en-oyment of property. 6uch direction is void as per 6.++ of the Act but 6.+7 is an exception.6.++ is applicable where there are absolute transfers whereas 6.+7 applies to all kinds of transfer. e.g.! A settler by deed directs accumulation for %9 years and himself lives for :& years! from the date of transfer. The accumulation for %9 years is good. This 6ection is akin to 6ection ++7 of $ndian 6uccession Act! +;%9. #ermissible period for Accumulation is as per law< i* 2ife of the transferor5 or ii*#eriod of +, years! whichever is longer. Any condition beyond this period is void and not operative. The direction can be for the whole or part of the income.
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Illu$trato! < = transfers his property property to > with a direction direction that the income of the said
properties shall accumulate during =s life and shall be given to @. The direction here is valid only up to the life of > and not after his death. E(CE)TION* +, )ayme!t of De-t$ . This rule is not applicable where the purpose for accumulation
is the payment of debts incurred by the transferor or any other person having an interest in the transfer . For example A makes a gift of his house to B with a direction that form the rents of the house B shall pay "s 9&& per months towards the satisfaction of a debt of "s on 2ac incurred by A. The direction of the accumulation of income is valid even it continues after the life of A or expiry of period p eriod of +, years. y ears. ., Accumulato! for ra$!' &orto!$, $t means providing a share of the income for maintenance. $t does not apply to cases where accumulation of income is for providing portions to children or for some remote issue of the transferor or any other person interested in the transfer. /, Ma!t Ma!te!a e!a!ce !ce of &ro&er &ro&erty ty,, Accum ccumula ulati tion on for for the prope properr maint mainten enan ance ce and and preservation of the property shall not be void even if it exceeds the life of the transferor or +, years from the date of transfer. *A0ING* *A0ING* OUT OF INCOME< These are not within the operation of the section and
ther theref efor oree Truste ustees es are are no nott prev preven ente ted d by reas reason on of this this sect sectio ion n from from maki making ng accumulations on saving. The basis underlying underlying this principle principle that as 2and is to be en-oyed by the profit that arise out of such a land and -ust as as law prevent the restraint on alienation! so also law disfavour disfavour any attempt attempt to prevent the income income being en-oyed en-oyed by the owner of the land and for the time being. 6o such accumulation of income is not allowed by law under section +7 . $t means direction of accumulation of income is valid if it is first up to the life of transferor or second upto period of +, years from the date of the transfer. ILLU*TRATION +. A transfer his properties to B for life with a direction that the income of the said
properties shall accumulated during As As life and shall be given also to C. The direction for the accumulation of income is valid ! upto life of B
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A transfers a property to B for life and thereafter to Bs such son who first attains the age of %9 years with a direction for accumulation of income till Bs first son attains %9 years . The direction of the accumulation of such income is void! reason it is beyond the permissible limit ) life or +, years*. A transfers transfers property property to B in +;& with a direc direction tion for the accum accumulation ulation of its benef benefits its upto +;;&. A dies in +;,9 thus the transferor lives for %9 years which is more than +, years . The direction for accumulation accumulation is valid upto +;,9 ) for %9 years* because because it is the longer period, %. A transfers property to B in +;:& which is with the direction that the income arising out of property is to be accumulated till +;7&. i.e. for D& years. A dies in +;9 . The period during which the transferor is alive is more than +, years y ears from the date of the transfer but being the longer of the two periods! the direction is valid till +;9. if however the transferor dies in +;9&. Then longer period would be +, years and accordingly the direction would remain valid till +;9,. Lister,, where the 0dry uestion1 that Turner E(C The leading case is Bassil v Lister E(C had to resolve! was whether a direction in the testators will that his trustees should pay out of the income of his residuary estate the premiums on a policy of insurance on the life of his son fell foul of the Thellusson Act. Turner E(C held that it did not. $t was not the function of the legislation to strike at 0bargains or contracts entered into for other purposes than the mere purpose of accumulation1. The payment of insurance premiums did not naturally fall within those words. $ndeed! he did not consider that the payment of such premiums was an accumulation in any event! because the money became the property of the insurance company and could not be attributed to a particular premium. Turner E(C E(C gave further illustrations of arrangements that fell outside the scope of the Act! such as partnership agreements and insurance policies on the lives of debtors5 and a settlement of insurance policies with shares transferred to pay the premiums out of the dividends. E1ce&to!$
However 6uch direction for accumulation of the income is valid even beyond the above stated period under section +7) +* if the direction is for the purpose of )a* The payment of the debts of the transferor ! or
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)b* The provision of portion for the children or ramoter issue of transferor !or of any other person taking interest under the transfer !or )c* The provision for maintenance of property transferred! or )d* where the property is transferred for the benefit of public or any other ob-ect beneficial to mankind for example charitable purposes. $n shor shortt the the direc direction tion for accumu accumulat lation ion of the income income is a particu particular lar mod modee of of restraining the en-oyment of the property. According to the principal laid down in 6ection 6ection +7 such direction for accumula accumulation tion would be void and inoperative inoperative but this section section provides an exception exception and permits a direction for accumulation accumulation of income to operate in certain cases. This 6ection allows accumulation of income upto the life of transferor transferor !or up to the period period of +, years! years! from the date of the transfer! transfer! whichever whichever is longer. EFFECT OF AN ACCUMULATION ACCUMULATION •
The effect of an excessive accumulation depends upon whether the direction merely breaches the rule against excessive accumulations of income or whether it also contravenes the rule against perpetuities. The latter has more serious
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conseuences than the former. First! a direction to accumulate that not only exceeds the relevant accumulation period but also contravenes the rule against perpetuities is wholly void. For example! a direction to accumulate income until the first grandchild of A reaches the age of %+! where A is alive and unmarried at the relevant date! is void for perpetuity at common common law. $t is not certain that the first grandchild grandchild of A to attain %+ will do so within %+ years of As death. That grandchild might! for exam exampl ple! e! be the the off offspri spring ng of a futu futurre bo born rn child hild of A. $n thes thesee circumstances! it appears that the common law test alone applies. $t is far from certain that Act extended the principle of 0wait and see1 to directions to accumulate. $f it has not! in the example given! the direction to accumulate income is wholly void! like any breach of the rule against perpetuities at common law. 6econdly! the direction to accumulate may comply with the common law rule agai agains nstt
per perpetu petuit itie iess
butt bu
bre breach ach
the the
stat statut utor ory y
rule ule
again gainst st exce excess ssiv ivee
accumulations. An example would be a direction to accumulate income until 5
the first child of A )who is alive and unmarried at the relevant date* should attain the age of %+. $n those circumstances! the direction to accumulate is void only to the extent that it exceeds the appropriate statutory period. TERMINATING AN ACCUMULATION The general rule There There is a well(known well(known situation situation where an accumulation accumulation can be brought to an Trevanion by 3oyce 34 end. The principle was stated in Re Trevanion 'here there is an absolute vested interest! it is well settled that the Court will not
enforce a trust for accumulation in which no person has any interest except the owner of the property the rents of which are to be accumulated. The leading leading case on this principle principle is Saunders v Vautier ! which has given its name to the wider rule stated in that case by 2ord 2angdale @" by which where a lega legacy cy is dire direct cted ed to accum accumul ulat atee for for a cert certai ain n peri period od!! or wher wheree the the payme payment nt is postponed! the legatee! if he has an absolute indefeasible interest in the legacy! l egacy! is not bound to wait until the expiration of that period! period ! but may reuire payment the moment he is competent to give a valid discharge. As a result! result! where one or more persons persons of full age and capacity capacity are absolutely absolutely and indefeasibly entitled to the capital and income of a gift under these circumstances! they may terminate the accumulation at any stage and reuire that the property be tran transf sfer erre red d to them! them! there thereby by ov over erri ridi ding ng the the direc directio tion n to accu accumu mula late te.. 'her 'heree the the direction to accumulate contravenes the rule against perpetuities and is therefore wholly void! the rule in Saunders v Vautier cannot apply. Re Burns $n this case the issue was the application application of the rule in a situation situation where the testator directed certain annuities be paid! and that the capital and surplus income be distributed after the death of one beneficiary in part to named people and in part to charities. An application was brought to challenge the continuing accumulation more than %+ years after the death of the testator. $t was was held held that that the the rule rule appli applied ed!! but that the court court could could invoke invoke its its eui euitab table le -urisdiction to resettle the funds fund s for the charities and then t hen to distribute the remainder. The significance of the case is that the rule applies to charitable donees as well as persons but bu t that the court can remedy the application of the rule for the benefit of the charities. Re Ellis 6
Here the executors executors sought the courts courts direction direction in respect respect of surplus funds that were established to make support payments and to fund remainder interests. The foundational rule in such cases is that the surplus should be accumulated in each fund with the remainder! after the various obligations have been satisfied! to be distributed in accordance with the testators wishes )or! in default! falling back into the residue of the estate*. To ascertain ascertain the testators testators intent! the court should look to the nature of the obligation and any residuary dispositions thus! here! the obligations were in respect of spousal support and maintenance of a disabled child. $n either situation! the income should accumulate to satisfy the obligations with the remainder to go as intended by the testator. Re Struthers This was a case of an implied accumulation of funds set aside from the general assets of the estate to pay annuities and claims against the estate. Here! the testator died in +;9&! left his wife a life interest in the estate! and then left certain remainder interests including a G79!&&& fund to be used to pay a G9&&& annuity.ne issue involved the accumulation accumulation of income on that fund. $t was held that the income on the G79!&&& fund that was in excess of that needed to fund the annuity due to a change in market market circumstanc circumstances es )higher rates of interest interest on investment than that anticipated anticipated by the testator* resulted in the rule reuiring the surplus accumulation to be distributed to the holders of the remainder interest RULE AGAIN AGAIN*T *T ACCUMU ACCUMULA LATI TION ON *ECTION +23 IT I* E(CE)TIO E(CE)TION N OF *++ *ecto! ++4 'here! on a transfer of property! an interest therein is created absolutely
in favour of any person! but the terms of the transfer direct that such interest shall be applied or en-oyed by him in a particular manner! he shall be entitled to receive and dispose of such interest as if there were no such direction. 'here any such direction has been made in respect of one piece of immoveable property for the purpose of securing the beneficial en-oyment of another piece of o f such property! nothing in this section shall be deemed to affect any right which the transferor may have to enforce such direction or any remedy which he may have in respect of a breach thereof.
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T%u$ E1ce&to!3
+. Iecessity of Beneficiary /n-oyment /n -oyment of property ad-acent to property. )'hich Mo1%a 1%ay y +,:, has been established in Tulk # Mo +,:,!:+ !:+ /" /" ++:D( ++:D( and call call the the
"/6T"$CT$E/ CE/IAIT6*. %. The condition condition has been been imposed imposed by by the transferor transferor himself. himself. Tulk v Moxhay Bref Fact *ummary, The #laintiff! Tulk )#laintiff*! had sold 2eicester 6uare by
deed containing. The 8efendant! @oxhay )8efendant*! a subseuent purchaser sought to
build
upon
t he
land.
#laintiff
brought
a
bill
for
in-unction.
*y!o&$$ of Rule of La5, 6ince a covenant is a contract between the vendor and the
vendee! it may be enforced against a subseuent purchaser who has notice of the contractual obligation of his vendor! even though it does not run with the land. Fact$, The #laintiff sold 2eicester 6uare with the restriction that it be maintained in a
certain form as a public 0pleasure ground1. The deed restriction was covenant for heirs and assigns reuiring that the land be maintained as a suare garden. The #laintiff continued to own homes and live around the suare after its sale. $n +,&,! the person who wh o originally origi nally purchased 2eicester 6uare from the plaintiff p laintiff had notice of the cove covena nant nt cont contai aine ned d in the the deed. deed. Fort Forty y year yearss late later! r! the prope propert rty y was was sold sold to the the 8efendant! @oxhay. @oxhal sought to build upon the land on the suare. #laintiff brought
a
bill
for
in-unction
to
stop
any
construction.
I$$ue, Can a covenant restricting a property to a specific use be enforced against a
subseuent purchaser? Hel", 'hether or not the covenant runs with the land! such an agreement could
properly be enforced in euity eui ty because the one who purchases the land from Tulk had notice of that covenant. 8efendant! @oxhal could not stand in a different situation from the owner from whom he purchased the property. An euitable servitude is enforceable by in-unction with no regard to privity! so long as the promise is intended
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to run and the subseuent purchaser has actual or constructive knowledge of the covenant.
CONTENT OF THE RULE A clear distinction can be drawn between the "ule against #erpetuities and the
rule against accumulations. accumulations. The rule against against accumulation accumulationss is concerned not with the vesti vesting ng of trust trust prop proper erty ty!! but with with inco income me gene genera rated ted ther theref efro rom. m. $n the bulk bulk of settlements! trustees will be bound! by the terms of the settlement! to distribute such income to the beneficiaries on a regular basis. However! a direction might be made Jto the effect effect that the income is not to be paid to the beneficiarie beneficiariess as it arises! but instead should be accumulated as a fund until the happening of some particular event.J $t is against such a possibility that the rule against accumulations is directed. 6tated simply! the common law rule states that such a direction is inoperable if the accumulation of income might persist beyond the perpetuity period! and the period is defined in the same way as for the "ule against #erpetuities! namely a life and %+ years. HI*TOR6 OF RULE OF ACCUMULATION ACCUMULATION The rule against accumulations of income originated in Thellusson v. Woodford a decision of the House of 2ords rendered in +,&9. At issue was the will of
#eter #eter
Thel Th ellus lusso son! n! 0an 0an enor enormo mousl usly y rich rich merc mercha hant nt and and fina financ ncie ier1 r1 who died $n
+7;7.Thellussons will provided that the bulk of his considerable estate! plus all the income it would earn during the lives of his nine surviving surviving male descendants! should be accumulated for the th e ultimate benefit of hisoldest surviving male descendant at the th e end of that period.Thellusson thus deviated substantially from the normal practice in which the father left his estate either to the oldest son or to all the sons eually. eually.+ + As #atrick #olden explains! 0This placed the family in an unprecedented and disturbing situation. 2ike some perverted tontine! it left some of them! who were themselves unable unable to en-o en-oy y any any of the the mo mone ney! y! postpon postponin ing g by their their conti continui nuing ng exist existen ence ce its distribution to those golden lads for whom it seemed destined.1 Thellussons family challenged the will. /ventually the case made it to the House of 2ords. 6peaking through 2ord 2ord /ldon! the House of 2ords 2ords conclude that there there was no violation of the "ule Against #erpetuities. The interest in Thellussons oldest male descendant would 9
vest at the end of the specified measuring lives. $t mattered not that none of the measuring lives was a beneficiary. 2ord /ldon then turned to the uestion uestion of whether whether the beuest beuest violated violated a separate rule against excessive accumulations of income+? 0a$t Fortu!e$,@ The The first worry is that accumulation trusts could produce a vast
fortune concentrated in one or two beneficiaries. But as 3onathan @acey has observed! 0unle 0unless ss trust trustee eess syste systema mati tica call lly y are are able able to inves investt trus trustt accu accumu mula lati tion onss so as to outp ou tper erfform orm all othe otherr inve invest stme ment nts! s! ther theree is no reaso eason n that that perm permit itti ting ng such such accumulations will allow wealth to become more concentrated.1 And trust investments do not outperform all other investments5 trustees do not have systematically better inform informat ation ion than than other other capit capital al mark market et inves investo tors rs.. Furt Furthe herr! even even afte afterr the rece recent nt moderniQation of trust investment law! as compared to outright ownership the trust form carries with it additional agency costs! an extra layer of fees and commissions! and higher rates of federal income taxation. /ach of these factors imposes drag on trust fund performance. >.? I!#e$tme!t D$torto!$33 The second worry4that accumulation trusts will distort
the economy4reflect economy4reflectss a Qero(sum Qero(sum view of property property that took root when land was the primary form of wealth. But wealth today is accumulated in liuid liui d financial assets! not land. And accumulations of financial assets such as marketable securities do not have the same potential for economic distortion as accumulations of land in /ngland may have had in +7;7. True! True! the modern modern trustee trustee remains remains sub-ect to the fiduciary fiduciary duty of prudence prudence in makin making g trus trustt inves investm tment ents. s. But But to assum assumee that that the trust trustee ee will will ther theref efor oree invest invest overcautiously or unproductively reflects a dated view of trust investment law. Rnder the modern law! which has been widely adopted! there are no categorical restrictions on investing trust assets. $nstead the modern law directs the trustee to craft an 0overall investment investment strategy1 strategy1 that reflects reflects 0risk and return ob-ectives ob-ectives reasonably reasonably suited to the trust.1This change in the law is significant. $n a new empirical empirical study! study! @ax 6chanQenbach 6chanQenbach find that adoption of modern prudent trust investment laws leads to a statistically significant shift from investment in fixed(return obligations to investment in euity. Against this it might be argued that a settlor could tie up vast sums of investment capital capital by opting out of the default law of trust investment in favor of a mandatory! value(impairing investment strategy. But 17
the the rule rule agai agains nstt accu accumu mula lati tion onss of inco income me do does es litt little le to solv solvee this this prob proble lem5 m5 valueimpairing investment instructions are problematic even if all the trusts income is dist distri ribu bute ted d each each year year.. Th Thee answ answer er to this this prob proble lem m lies lies inst instea ead d in narr narrow ow constructions of uneconomic instructions! robust application of the principle that a private trust must be for the benefit of the beneficiary! and -udicially approved deviation from administrative provisions. $n sum! the shift in the nature of wealth from land to financial financial assets and the revolution in trust investment law! taken together! render obsolete the concern over economic distortions stemming from accumulations in trust. CONCLU*ION The rule against accumulations of income limits the time during which a settlor
may direct the trustee to accumulate and retain income in trust. At common law! the accumulations period was that of the applicable perpetuities period. Thus! for two hundred years the rule against accumulations has lurked in the shadow of its older and more distinguished cousin! the "ule Against #erpetuities. 'ith the erosion of the "ule Against #erpetuities! however! the rule against accumulations of income may have newfound relevance. #erpetual trusts are more likely than ordinary trusts to involve accumulations of income! and such trusts are designed to endure beyond the common law period for permissible accumulations. Thus assessed the relevance of the rule against accumulations for the rise of the perpetual trust. $n short! because repeal of the "ule Against #erpetuities probably also modifies the rule against accumulations! and if not the accumulations rule will likely be abolished by legislation! there is little reason to think that the accumulations rule will impede the rise of the perpetual trust. Thus found the continuing soundness of the accumulations rule.
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