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Solicitors welcome change in rules on accumulations

13 January 2010

The Perpetuities and Accumulations Act 2009 will come into force on 6 April 2010, justice minister Bridget Prentice has announced.

The Act will abolish the 21-year limit on the ability of trustees of private trusts to accumulate rather than distribute income and introduce a standard perpetuity period of 125 years for all new trusts.

Ian Bradshaw, head of private client at Goodman Derrick, welcomed the change.

“Previously, where you had family trusts earning huge amounts of income on an annual basis, trustees could no longer accumulate income after 21 years,” he said.

“You had to pay out the income, regardless of whether you wanted to or not. There may be occasions when it could be unhelpful, for example if beneficiaries were too young or they had drug or alcohol problems or had joined a religious sect.”

Bradshaw also welcomed simplification of the rules on perpetuity periods, though he said most trusts were not caught by the existing limit, which in most cases is 80 years.

Caroline Kirby, private client partner at Farrer & Co, said the change in the rules on accumulations would give trustees more ability to filter the flow of funds to beneficiaries.

She gave the example of assets in a family company being put in a trust for the benefit of grandchildren. If the shares greatly increased in income, trustees might have to distribute large amounts of income to young beneficiaries.

“Some may not be very mature,” she said. “They might not be capable of dealing with large amounts of income. The situation acted as a disincentive for some people in setting up a trust.”

Kirby said the abolition of the 21-year limit on accumulations would boost the attractiveness of setting up an English law trust to international clients, particularly those concerned about the third generation becoming entitled at too early an age.

“It’s a great improvement on what we had,” she said. “The trust fund can grow and the trustees retain their discretion.”

The Act retains the existing 21-year limit on accumulations for charitable trusts. Any change would need the permission of the courts or the Charity Commission.

The Perpetuities and Accumulations Act was the first piece of primary legislation to be introduced into Parliament under a special procedure, allowing bills based on Law Commission recommendations to be introduced directly into the Lords.

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