Legal Definitions - rule against accumulations

The rule against accumulations is a legal principle that restricts the ability of a trust or other legal entity to indefinitely retain and reinvest its income, rather than distributing that income to its beneficiaries. The primary goal of this rule is to prevent wealth from being perpetually locked away and growing within a trust, thereby ensuring that assets eventually become available for use by individuals or for broader economic circulation. It sets a time limit, often tied to the Rule Against Perpetuities (which limits how long property can be held in trust before its ownership must be certain), after which accumulated income must be distributed.

• Example 1: The Long-Term Educational Fund

  A philanthropist establishes a trust fund intended to provide scholarships for their descendants. The trust document specifies that all investment income generated by the fund should be reinvested and accumulated for 75 years, with no scholarships to be awarded until after this period. The philanthropist's intent is for the fund to grow significantly before it starts making distributions.

  How it illustrates the rule: The rule against accumulations would likely invalidate or modify the 75-year accumulation period. While some accumulation is generally permitted, an indefinite or excessively long period, such as 75 years before any distribution, would violate the rule. The law aims to prevent wealth from being hoarded for such an extended time, requiring that income eventually be distributed to the beneficiaries (in this case, for scholarships) within a legally defined reasonable timeframe.

• Example 2: The Family Business Reinvestment Trust

  A family patriarch places ownership of a successful manufacturing company into a trust for the benefit of his children and grandchildren. The trust agreement mandates that 90% of the company's annual profits (which constitute the trust's income) must be reinvested back into the company indefinitely, with only a small percentage distributed to beneficiaries. The goal is perpetual growth of the family enterprise within the trust structure.

  How it illustrates the rule: Here, the trust is designed to accumulate a significant portion of its income (company profits) for an unlimited duration. The rule against accumulations would intervene to prevent this indefinite reinvestment. It would require that, after a certain permissible period, a greater proportion of the trust's income be distributed to the beneficiaries, rather than continuously accumulated within the trust, ensuring that the wealth eventually benefits the individuals it was intended for.

• Example 3: The "Future Generations" Wealth Preservation Trust

  An individual creates a complex trust designed to preserve a large fortune for "future generations," stipulating that all income from the trust's vast investment portfolio must be added to the principal and reinvested for as long as legally possible, with distributions only to begin when the principal reaches a certain astronomical sum, or after a very distant, unspecified future event.

  How it illustrates the rule: This scenario directly challenges the rule against accumulations. By mandating that *all* income be added to the principal and reinvested for an extremely long or indefinite period, the trust attempts to prevent the circulation of wealth. The rule would step in to limit this accumulation period, compelling the trust to begin distributing its income to beneficiaries within the legally prescribed timeframe, rather than allowing the wealth to compound indefinitely without benefiting living individuals.