Legal Definitions - accumulations, rule against

The Rule Against Accumulations is a legal principle that limits how long a person can direct that income generated by their property be held onto (accumulated) rather than being paid out to beneficiaries. Essentially, it prevents someone from setting up a trust or will that indefinitely collects income from assets without distributing it.

This rule ensures that wealth eventually becomes available for use by living individuals, rather than being perpetually tied up by instructions from the past. The period for which income can be accumulated is typically tied to the "perpetuity period," which is generally defined as the lifetime of someone alive when the arrangement was created, plus an additional 21 years. If a direction to accumulate income exceeds this period, it is usually deemed invalid.

• Example 1: Long-Term Family Trust

  A wealthy individual, Mr. Smith, creates a trust in his will. He directs that all rental income from his extensive real estate portfolio be accumulated for 70 years after his death. After this period, the accumulated sum, plus future income, is to be distributed to his then-living descendants.

  This scenario illustrates the Rule Against Accumulations because Mr. Smith is attempting to tie up the income from his property for an extended period (70 years) before it is distributed. This duration likely exceeds the "perpetuity period" (lives in being plus 21 years), which is the maximum time allowed for such accumulations. The rule would intervene to prevent this indefinite accumulation, ensuring that the wealth eventually becomes accessible to beneficiaries within a legally defined timeframe.

• Example 2: Endowment for a Future Project

  A philanthropist establishes an endowment fund for a university, specifying that all investment income from the fund must be accumulated for 60 years. After 60 years, the entire accumulated sum is to be used to build a new, unnamed research facility. No distributions are allowed before that time.

  Here, the philanthropist's directive to accumulate all income for 60 years before any of it can be spent or distributed for the university's benefit directly engages the Rule Against Accumulations. The rule would scrutinize whether this 60-year accumulation period falls within the legally permissible "perpetuity period." If it exceeds that limit, the accumulation clause would be deemed invalid, and the university might be able to access the income sooner, or the funds might be subject to different distribution rules.

• Example 3: Business Succession Plan

  A business owner, Ms. Chen, sets up a complex will for her successful manufacturing company. She dictates that all company profits (income) must be reinvested and accumulated within the company for 50 years after her death, with no dividends or distributions to be made to her heirs during that time. After 50 years, the accumulated profits and the company itself are to be sold, and the proceeds distributed among her then-living great-grandchildren.

  This example demonstrates the Rule Against Accumulations because Ms. Chen is directing that the income (profits) from her business be held and reinvested for a very long period (50 years) without any distribution to her heirs. This extended period of accumulation would likely violate the rule, which aims to prevent wealth from being locked away for generations beyond the "perpetuity period." A court applying the rule would likely invalidate the 50-year accumulation clause, potentially allowing her heirs to receive distributions or control the company's profits much sooner.