Introducing the RAP.
With the possible exception of mentioning the Bar Exam, many law students and practitioners alike are terrified when their professor or client brings up a ‘RAP’ issue. Keep calm, us legal professionals continue to listen to Drake, Lauryn Hill, and other influential rap artists; rather, what we are concerned with are property rights type ‘RAP’ issues. The rule against perpetuities (“RAP”) is a common law doctrine that arose in 1682 under English common law in the Duke of Norfolk’s Case.[1] In short, the RAP seeks to prohibit certain legal instruments, such as trusts, from alienating private property for periods of time long after the death of the creator of such instrument. Another way to explain this is that the law disfavors individuals from reaching out of their grave long after their death, through the use of previously executed legal instruments, to prohibit or otherwise qualify the ownership of property. Though the RAP has the potential to impact everyone who owns real estate, those most concerned include individuals with large real estate holdings of which they wish to pass down from generation to generation, especially those who wish to distribute such real estate through their trust.
Indiana’s Rule Against Perpetuities.
Prior to July 1, 2024, the RAP in Indiana required that an interest in property vest, if ever, within twenty-one (21) years of the death of the life in being—the person who was alive at the time the interest was created—or within ninety (90) years of the trust becoming irrevocable.[2] The secondary, 90-year vesting period is commonly referred to as the “wait and see” rule. However, effective July 1, 2024, in accordance with House Enrolled Act 1209, Indiana has, for most situations, extended its ninety (90) year rule to a three hundred sixty (360) year “wait and see” rule.
How this Impacts You.
The Indiana law change allows individuals with trusts to hold property in their trust for the benefit of future generations for longer periods of time than previously permitted. In other words, though the previous Indiana statute required a trust to terminate within ninety (90) years of it becoming irrevocable, that same trust may now continue for a total of three hundred sixty (360) years. Therefore, Indiana trusts can now be written to benefit not only the next generation, but likely up to the next four or five generations.
Trusts have always been powerful instruments to help families maintain control over their assets, especially real estate, and to protect such assets against unforeseen or unwanted future events, including but not limited to creditor claims, divorce, bankruptcy proceedings, probate, and certain taxes. In light of the recent changes described above, this control and protection can now be extended for several, future generations.
RAP Changes in Other States.
Indiana’s change is far from unique. In fact, for quite some time, various states have been enacting legislative modifications to the common law RAP. For example, Florida extended its RAP to a maximum of one thousand (1,000) years in 2022. In comparison, the business-friendly state of Delaware has only extended its RAP to a maximum of one hundred ten (110) years. However, some states have taken even greater strides, including Kentucky, which has effectively abolished the RAP in its entirety. Therefore, Indiana’s recent change does not necessarily upend common law jurisprudence, but rather shows that the State is following the modern trend in permitting greater flexibility in generational wealth planning.
Conclusion.
While Indiana’s change to the RAP is not unique, it is significant and is certain to impact families, especially those with large real estate holdings, including farmers, as they begin determining how best to distribute such real estate holdings. If you or your family need assistance regarding your estate plan or have more in-depth questions regarding generational planning, Stoll Keenon Ogden’s team of attorneys is ready to help.
[1] See 22 ER 931; 3 Ch Cas 1.
[2] A revocable trust generally becomes irrevocable upon the death of the grantor.
