Texas Legislature Extends 300-Year Lifetime Rule for Trusts | PC Winstead
The Texas legislatures recently passed a bill that comes into force on September 1, 2021 and extends the rule against perpetuities to 300 years for trusts. The Legislature forwarded the bill (HB 654) to the governor on May 20, 2021, but he has not yet signed the bill. But unless he veto the bill, it will become law after ten days.
The Texas Constitution prohibits perpetuities: “Perpetuities and monopolies are contrary to the genius of free government and will never be allowed. . . . »Tex. Const. art. I, § 26. Life imprisonment is a restriction on the power of alienation that lasts longer than a prescribed period. ConocoPhillips Co. v. Koopmann, 547 SW3d 858, 866-67 (Tex. 2018). The rule against perpetuities “should be a curb on the vain and capricious actions of wealthy empire builders.” But this should not be a constantly present threat to reasonable arrangements that go slightly beyond a technical line. ” Rekdahl vs. Long, Texas, 417 SW2d 387 (1967) (Steakley, J., dissenting) (citing WB Leach & O. Tudor, The Rule Against Perpetuities § 24.11-43 (1957)).
Historically, the rule against perpetuities invalidates any will or trust that “attempts to create an estate or future interest which by no means can become vested in a lifetime or lives in progress at the time of the testator’s death and twenty-one years later, and the gestation period, if applicable. Foshee v. National Bank of the Republic of Dallas, 617 SW2d 675, 677 (Tex. 1981) (citing Kettler v. Atkinson, 383 SW2d 557, 560 (Tex. 1964)). The rule against perpetuities also applies to non-charitable trusts, and a perpetual trust of indefinite duration is void. See Prop code. tex § 112.036.
The Texas Legislature recently amended Section 112.036 of the Texas Trust Code, and that section now provides that an interest in a trust must be acquired, if applicable: (1) no later than 300 years from the date of entry into effective date of the trust, if the effective date of the trust is on or after September 1, 2021; or (2) except as provided in paragraph (d), no later than 21 years after a certain life at the time of the creation of the interest, plus a gestation period, if the effective date of the trust is before September 1, 2021. Tex. Prop. Code 112.036 (c). The effective date of the trust is the date on which the trust becomes irrevocable. Username. to 112.036 (b).
A trust that has an effective date before September 1, 2021 may still have the 300-year period applied if the trust instrument provides that an interest in the trust is acquired under the provisions of Article 112.036 applicable to trusts on the date on which the interest is acquired. Tex. Prop. Code 112.036 (d). The new section 112.036 does not address its interaction with section 112.054 (b-1) of the Texas Trust Code, which was added in 2017. Acts 2017, 85th Leg., C. 62 (SB 617), §§ 4, 5, effective September 1, 2017. Section 112.054 (b-1) of the Texas Trust Code states:
At the request of a trustee or beneficiary, a court may order that the terms of the trust be reformed if: (1) reform of the non-critical administrative terms of the trust is necessary or appropriate to avoid waste or waste. deterioration in the administration of the trust; (2) the reform is necessary or appropriate to achieve the grantor’s fiscal objectives or to qualify a beneficiary of government benefits and is not contrary to the grantor’s intentions; or (3) reform is necessary to correct a writer’s error in the constituent document, even if it is unambiguous, to conform the terms to the grantor’s intention.
Prop code. tex. 112.054 (b-1). In addition, “the reform of a trust under an ordinance described in paragraph (b-1) takes effect from the creation of the trust”. Username. to 112.054 (c). A trustee or beneficiary who wishes to maintain a trust prior to September 1, 2021 and which is about to terminate due to the rule against perpetuities may seek to reform the trust instrument to indicate that an interest in the trust is acquired under the provisions of article 112.036. If a court granted this exemption, the trust would be reformed until its creation to comply with the section 112.036 (d) exception which allows trusts prior to September 1, 2021 to have a 300-year rule against the period of perpetuity. Courts in other jurisdictions have reformed trusts to ease a rule against violation of perpetuities. See, for example, In the area of Chun Quan Yee Hop, 52 Ah. 40, 469 P.2d 183 (1970) (reform of the will to conform to the common law rule against perpetuities using a fair approximation); In the domain of Foster, 190 Kan. 498, 376 P.2d 784 (Kan. 1962) (excision of part of the will which would invalidate the donation); Carter vs. Berry, 243 Miss. 356, 140 So.2d 843 (Miss. 1962) (reduction of the age contingency); Grove Estate (1977), 70 Cal. App.3d 355, 138 Cal. Rptr. 684; In the domain of Re Ghiglia (1974), 42 Cal.App.3d 433, 116 Cal.Rptr. 827; Scott v. South Trust Asset Management Co., 274 Ga. 523, 555 SE2d 732 (2001) (use of law to reform trust to comply with rule against perpetuities); May vs. Hunt (1981), Miss., 404 So.2d 1373; Estate of Sophie D. Githens, 1991 NYLJ LEXIS 7347 (NY Sur. Ct. April 11, 1991) (will reformed under law to comply with rule against perpetuity); Edgerly vs. Barker (1891), 66 NH 434, 31 A. 900; Berry v. Union National Bank (1980), 164 W. Va. 258, 262 SE2d 766. Hoover v. Jolley, 45 Va. Cir. 309, 1998 Va. Cir. LEXIS 83 (Va. CC April 7, 1998) (law used to reform the will to comply with the rule against perpetuities). These cases involve courts reforming trusts to comply with the rule against perpetuities so that they do not default. These are not trusts that comply with the rule and where the parties want to reform trusts to extend them after a change in the rule against perpetuities. There are good arguments both for and against allowing such a reform (certainly, the statutory change would not be foreseen by most of the settlers when they created their trusts). However, it is worth asking whether such a reform, even if it is possible, may have negative tax implications.
Further, section 112.036 (e) provides that a trust may be reformed or interpreted to the extent and as provided for in section 5.043. Prop code. tex. 112.036 (e). Article 5.043 deals with real and personal interests and provides:
(a) Within the bounds of the rule against perpetuities, a court must reform or interpret an interest in real or personal property that violates the rule to achieve the verifiable general intention of the creator of the interest. A court must freely interpret and apply this provision to validate an interest to the fullest extent consistent with the creator’s intention.
(b) The court may reform or interpret an interest under subsection (a) of this section according to the cypress doctrine by giving effect to the general intent and specific directions of the creator within the limits of the rule. against perpetuities.
(c) If an instrument which violates the rule against perpetuities can be reformed or interpreted under this article, a court shall apply the provisions of the instrument which do not violate the rule and must reform or interpret under this article a provision that violates or could violate the rule.
(d) This section applies to legal and equitable interests, including donations and non-charitable trusts, transferred by inter vivos deed or will which takes effect on or after September 1, 1969, and this section applies applies to an appointment made on or after whatever the date of creation of the power.
Prop code. tex. § 5.043. See also Yowell v. Granite Operating Co., n ° 18-0841, 2020 Tex. LEXIS 425 (Tex. May 15, 2020) (discussing reforming the document to comply with the rule against perpetuities); Marsh vs. Frost Nat’l Bank, 129 SW3d 174, 177 (Tex. App. — Corpus Christi 2004, pet. Refused) (referral of the matter in trust to the court of first instance for it to consider a reform in order to alleviate the rule against perpetuity issues). “Before the reform as indicated in [Section] 5.043 can occur, there must be an attempt to convey an interest in real or personal property that violates the rule against perpetuity. Ball vs. Knox, 768 SW2d 829, 831-832 (Tex. App. — Houston [14th Dist.] 1989, no brief).
The law specifies that a settlor of a trust cannot order that real estate be kept or refuse that real estate can be sold for a period of more than 100 years. Prop code. tex. 112.036 (f). Therefore, a party cannot use a trust to lock in real estate for more than 100 years.
As a result, this legislative change will have a drastic effect on the operation and termination of trusts in Texas, as it changes the historical treatment of trusts in Texas and the rule against perpetuity. Lawyers who draft wills and trusts should be aware of this statutory change and discuss with settlers how long the settlors want a trust to last and when it should end. For settlers who want long-term trusts, they now have the power to make them last 300 years after the effective date of the trust. Even if it is not perpetual, 300 years is still a very long time.