accumulation-sec17-transfer of property

7/26/2019 ACCUMULATION-SEC17-TRANSFER OF PROPERTY

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DOCTRINE OF ACCUMULATION

INTRODUCTIONA property owner is thinking of making a will or creating a trust. How far into

the future should the law allow him or her to reach when tying up that 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 and retain income in trust

to the applicable perpetuities period. $n the typical case! compliance with the "ule

Against #erpetuities ensures compliance with the rule against accumulations. Hence!

for %&& years! the rule against accumulation! 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 prescribe accumulations 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 be accumulated! is an important aspect of trust administration and law! with

potentially serious conseuences for any breach. However! until the Accumulations

Act +,&&! the law in this area barely seems to have been the 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 excessive accumulations works a similar

mischief in relation to trusts. $t long predates the emergence of the modern

discretionary trust! in which powers to accumulate are an important element. The

reasonable wishes of settlors will often be incapable of fulfilment or will run the risk

of being defeated by an absolute rule that cannot be side(stepped.

THE MEANING OF AN ACCUMULATION

For the purposes of the rule! the meaning of the term 0accumulation1 is

tolerably clear. $n the leading modern case! Re Earl of Berkeley! Harman 23

expressed the view that4Accumulato! to my m!" !#ol#e$ t%e a""to! of !come to ca&tal t%u$

!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 notlose its character as income! and had to be applied as such to the extent that it wasnot 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 inrelation to repairs

DIRECTION FOR 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 with a 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 of +, years.., 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!te!a!ce of &ro&erty, Accumulation for the proper maintenance 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* OUT OF INCOME< These are not within the operation of the section and

therefore Trustees are not prevented by reason of this section from making

accumulations on saving. The basis underlying this principle that as 2and is to be en-oyed by the profit

that arise out of such a land and -ust as law prevent the restraint on alienation! so also

law disfavour any attempt to prevent the income being 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 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 property to B in +;& with a direction for the accumulation of its benefits

upto +;;&. A dies in +;,9 thus the transferor lives for %9 years which is more than +,

years . The direction for accumulation is valid upto +;,9 ) for %9 years* 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 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,. The leading case isBassil v Lister,where the 0dry uestion1 that Turner 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 gave further illustrations of arrangements that felloutside 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 short the direction for accumulation of the income is a particular mode of

restraining the en-oyment of the property. According to the principal laid down in

6ection +7 such direction for accumulation would be void and inoperative but this

section provides an exception and permits a direction for accumulation of income to

operate in certain cases. This 6ection allows accumulation of income upto the life of

transferor !or up to the period of +, years! from the date of the transfer! whichever is

longer.

EFFECT OF AN 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

conseuences than the former.

First! a direction to accumulate that not only exceeds the relevant accumulationperiod 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 law. $t is not certain that the first grandchild of

A to attain %+ will do so within %+ years of As death. That grandchild might!

for example! be the offspring of a future born child of A. $n these

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

against perpetuities but breach the statutory rule against excessive

accumulations. An example would be a direction to accumulate income until

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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 is a well(known situation where an accumulation can be brought to an

end. The principle was stated inRe Trevanionby 3oyce 34'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 case on this 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

legacy is directed to accumulate for a certain period! or where the payment is

postponed! the legatee! if he has an absolute indefeasible interest in the legacy! is not

bound to wait until the expiration of that period! but may reuire payment the moment

he is competent to give a valid discharge. As a result! where one or more persons of full age and capacity are 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

transferred to them! thereby overriding the direction to accumulate. 'here the

direction to accumulate contravenes the rule against perpetuities and is thereforewholly void! the rule in Saunders v Vautier cannot apply.

Re Burns

$n this case the issue was the application of the rule in a 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 tocharities. An application was brought to challenge the continuing accumulation more

than %+ years after the death of the testator.$t was held that the rule applied! but that the court could invoke its euitable

-urisdiction to resettle the funds for the charities and then to distribute the remainder.

The significance of the case is that the rule applies to charitable donees as well aspersons but that the court can remedy the application of the rule for the benefit of the

charities.

Re Ellis

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Here the executors sought the courts direction in 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 the testators intent! the court should look to the nature of the obligation

and any residuary dispositions thus! here! the obligations were in respect of spousalsupport 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 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 circumstances )higher rates of interest on investment than that anticipated by

the testator* resulted in the rule reuiring the surplus accumulation to be distributed to

the holders of the remainder interest

RULE AGAIN*T ACCUMULATION *ECTION +23 IT I* E(CE)TION 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 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 of property ad-acent to property. )'hich

has been established in Tulk # Mo1%ay +,:,!:+ /" ++:D( and call the

"/6T"$CT$E/ CE/IAIT6*.%. The condition has been imposed by the transferor 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 the 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 originally purchased 2eicester 6uare from the plaintiff had notice of the

covenant contained in the deed. Forty years later! the property was sold to 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 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. The rule against accumulations is concerned not with the

vesting of trust property! but with income generated therefrom. $n the 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 that the income is not to be paid to the beneficiaries 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

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 Thellusson! 0an enormously rich merchant and financier1 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 male descendants! should

be accumulated for the ultimate benefit of hisoldest surviving male descendant at the

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.+ 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 to en-oy any of the money! postponing by their continuing existence 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 /ldon! the House of 2ords conclude that there was no violation of the

"ule Against #erpetuities. The interest in Thellussons oldest male descendant would

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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 of whether the beuest violated a

separate rule against excessive accumulations of income


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misplaced. 'hen his grandson Charles died in +,9! Thellussons trust came to an

end! but the predicted vast fortune had not materialiQed. As #olden aptly observed!

0nearly sixty years of accumulation had not produced one million pounds let alone

thirty. From being a public menace! #eter Thellusson had become a laughing stock.1For an accumulation trust to amass a concentration of disproportionatewealth! its

investment portfolio must outperform all other investments4anearly impossible feat.

$ndeed! until recently trust investment law encouragedoverinvestment in 0long(term

fixed(return obligations such as mortgages and bonds.1 @oreover! as compared to

outright ownership! the trust form introduces additional fees and commissions

particularly where! as in Thellussons case! the trust is a testamentary trust that

remains sub-ect to court supervision.Iot surprisingly! other accumulation plans have also failed. #erhaps the most

famous! the design of which )but not the result* was probably known to Thellusson

when he executed his will! is Ben-amin Franklins. 'hen Frank(held it! before the

House of 2ords rendered its decision on ap(to accumulate income with no payouts for

+&& years! then to spend most of the principal for the benefit of public purposes in

Boston and #hiladelphia! and then to accumulate again for another +&& years. Both

trusts performed relatively poorly! with the Boston trust drawing less than G9 million

into its vortex by +;;& and the #hiladelphia trust sucking in less than half that amount. As 8avid Hayton puts it< 0The economic and social fears of accumulation have

proved groundless.1 $n the twentieth century! 0the tide turned in this country against

the strict type of legislation for which the Thellusson Act was a model.1 Today! in

country with a statutory rule against accumulation of income in private trusts! the

accumulation period is typically the same as the period of the "ule Against

#erpetuities. Rnder such statutes Thellussons will would be upheld The rule against

accumulations was Therefore recogniQed as a doctrine independent from the "ule

Against #erpetuities! though the accumulations rules durational limit was that of the

applicable perpetuities period. Because the durational limit under the two rules is the

same! compliance with the "ule Against #erpetuities typically ensures compliance

with the rule against accumulations4but not always. Here is an example of a transfer

that is valid under the "ule Against #erpetuities but offends the rule against

accumulations+? 0a$t Fortu!e$,@The first worry is that accumulation trusts could produce a vast

fortune concentrated in one or two beneficiaries. But as 3onathan @acey has observed!

0unless trustees systematically are able to invest trust accumulations so as to

outperform all other investments! there is no reason that permitting 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

information than other capital market investors. Further! even after the recent

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!$33The second worry4that accumulation trusts will distort

the economy4reflects a Qero(sum view of property that took root when land was the

primary form of wealth. But wealth today is accumulated in liuid 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! the modern trustee remains sub-ect to the fiduciary duty of prudence in

making trust investments. But to assume that the trustee will therefore 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 strategy1 that reflects 0risk and return ob-ectives reasonably suited to the

trust.1This change in the law is significant. $n a new empirical study! @ax 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 by opting out of the default law

of trust investment in favor of a mandatory! value(impairing investment strategy. But

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the rule against accumulations of income does little to solve this problem5

valueimpairing investment instructions are problematic even if all the trusts incomeis distributed each year. The answer to this problem lies instead in narrow

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 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 involveaccumulations 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 theaccumulations rule.

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