Second Look Doctrine

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SECOND LOOK DOCTRINE

In the law of future interests, a rule that provides that even though the validity of interests created by the exercise of a power of appointment is ordinarily measured from the date the power is created, not from its exercise, the facts existing on the date of its exercise can be considered in order to determine if therule against perpetuitieshas been violated.

At common law, the rule against perpetuities prescribed that no interest in property is valid unless it vests, if at all, not later than 21 years plus the period of gestation after some life or lives in being at the time of the creation of the interest. A property interest vests when it is given to a person in being and is not subject to a condition precedent (the occurrence of a designated event). This rule restricts a person's power to control the ownership and possession of her property after her death and ensures the transferability of property.

The second look doctrine has been applied to mitigate the harsh effect of the rule against perpetuities on a power of appointment—authority granted by one person by deed or will to another, the donee, to select a person or persons who are to receive property.

For example, B was the life income beneficiary (one who profits from the act of another) of a trust and the donee of a special power over the succeeding remainder—the property that passes to another after the expiration of an intervening income interest. His father, F, who predeceased him, established the trust in his will. B exercised his power through his own will, directing that the income be paid after his death to his children for the life of the survivor and that, upon the death of his last surviving child, the corpus—the main body or principal of a trust—be paid to his grandchildren. At F's death, B had two children, X and Y. No other children were born to B, and at his death, X and Y are still alive.

B's appointment is valid. The perpetuity period is measured from F's death. If only the facts existing at F's death could be considered, however, B's appointment would partly fail because of the possibility that he might have another child after F's death who would have children more than 21 years after the deaths of B, X, and Y. In considering the validity of B's appointment, however, not just the facts existing when the perpetuity period commences to run on B's appointment are considered. The facts existing at B's death can be taken into account under the second look doctrine, which thereby saves B's appointment. At B's death, it is known that no additional children were born to him after F's death. Thus B's last surviving child will be either X or Y, both of whom were "in being" at F's death and, therefore, constitute the measuring lives.

The second look doctrine is a departure from the fundamental principle that only the facts in existence when the perpetuity period commences to run can be taken into account in determining validity. Until the appointment is made, the appointed interests cannot be litigated. No useful purpose, therefore, is served by invalidating appointed interests because of what might happen after the power is created, but which at the time of exercise can no longer happen.

In some jurisdictions, this doctrine has been extended to gifts-in-default, which involve the expiration of the power, such as when the donee releases the power or dies without having exercised it.

For example, B was the life income beneficiary of a trust and the donee of a power over the succeeding remainder interest. In default of appointment (that is, B fails to name anyone to receive the property after he dies), the income after B's death was to be paid to his children for the life of the survivor, and on the death of B's last surviving child, the corpus was to be paid to B's grandchildren. B's father, F, who predeceased him, created the trust in his will. At F's death, B had two children, X and Y. B died without having additional children and without exercising his power. B was survived by X and Y.

F's death marks the commencement of the running of the perpetuity period as to the gift-in-default. Nevertheless if a second look at the facts existing at B's death is permissible, the gift-in-default is valid. The measuring lives are X and Y. If no second look is permissible, the remainder interest in favor of B's grandchildren is invalid. As of F's death, there was a possibility that B might have a child after F's death, that such a child might have survived B, and that such child might have had a child, B's grandchild, more than 21 years after the death of the survivor of B, X, and Y.

A default clause creates property interests no different from other property interests except that they are subject to divestment upon the exercise of the power. If B had not been granted a power of appointment in the above example, the interests created by the default clause would clearly be judged on the basis of the facts existing when F died. No second look as of B's death would be permissible, unless the jurisdiction had adopted the wait and see doctrine. Until the power of appointment expires, it cannot be known whether the gift-in-default of appointment is to control the disposition of the property or whether it is to be superseded by some appointment that the donee makes. Therefore no possible delay in adjudging the validity of the remainder is entitled in examining facts that exist at the date the power expires unexercised.

Jurisdictions that do not apply the doctrine to gifts-in-default maintain that its application to appointments is justified because the appointed interests are unknown, and, consequently, it is impossible to adjudicate their validity until the appointment is made, not because it is unlikely that anyone would want to adjudicate their validity until that time. The interests created by a default clause, unlike appointed interests, are known, and their validity can be litigated before the expiration of the power. These jurisdictions reason that the rationale for taking a second look in the case of appointed interests does not apply to interests created in the default clause.