The Texas Legislature has passed HB 654, which is a Bill that does only one thing – it amends Section 112.036 of the Texas Trust Code (a part of the Texas Property Code). It’s on to the Governor, presumably for his signature.
Section 112.036 sets out the maximum time that a trust, other than a charitable trust, can last. Until the amendment, which is effective September 1, 2021 (more on that below), a Texas trust, once it becomes irrevocable, can last only as long as people designated (what some call “measuring lives”) are alive, plus an additional 21 years. For example, the measuring lives are your children and grandchildren. Suppose further that at the time you set up the trust and it becomes irrevocable (whether during your lifetime or at your death), you have three living children and six living grandchildren. Under the old rule, when all nine of them have died, the trust can last a maximum of 21 more years. At that point, the trust would have to terminate and the assets inside would have to be distributed. Trusts that don’t have that limitation in them are invalid (but can be corrected or reformed as described below).
HB 654 changes the rule substantially, and sets out a clear, new limit that is easy to determine (unlike the prior rule which required the tracking of the lifetimes of the measuring lives to determine when the additional 21 year period would begin).
Subsection (a) says that the rule applies to an interest in a trust, other than a charitable trust.
Subsection (b) defines the “effective date” of a trust as the date on which the trust becomes irrevocable.
Subsections (c) and (d) (new) provide the new rule. Subsection (c)(1) says that an interest in the trust must “vest, if at all” (which basically means that the trust beneficiary or beneficiaries have to become the owners) “not later than 300 years after the effective date of the trust.” That 300 year limit applies to trusts that become irrevocable (that is, have their “effective date”) on or after September 1, 2021.
Subsection (c)(2) simply says “or except as provided in Subsection (d).” That provision refers to trusts that have an effective date before September 1, 2021.
New Subsection (d) says, “An interest in a trust that has an effective date before September 1, 2021, may vest as described in Subsection (c)(1) if the trust instrument provides that an instrument in the trust vests under the provisions of this section applicable to trusts on the date that the interest vests.” I interpret that to mean that an existing trust which has language in it referring to the old rule will be treated as though the trust had language in it that refers to the new 300 year limit.
I’m hopeful that I will get feedback from those of you who have been closer to the legislative process on the intent of Subsection (d).
Subsection (e) says that any interest in a trust may be reformed or construed to the extent and as provided by Section 5.043. That statute mandates that a court reform a trust which has a provision violating the rule against perpetuities, so as to validate the trust (as opposed to invalidating the trust for that reason).
There is a significant exception to this new 300 year rule. New Subsection (f) says, “Under this section, a settlor of a trust may not direct that a real property asset be retained or refuse that a real property asset may be sold for a period longer than 100 years.” In other words, the family homestead, the ranch, the mountain home, the seaside resort, etc., can only be tied up for 100 years as opposed to 300 years.
However, the statute does not address what happens if the trust owns an interest in a business entity like an LLC, partnership etc., and the business entity owns the real property. It is possible that the trust could direct that an ownership interest in a business entity may not be sold or otherwise transferred, and indirectly defeat the 100 year limit. It’s also arguable that the intent of the legislation should require a court to order a business entity to divest itself of the real property at or after the 100-year mark. That argument might be somewhat difficult to make if the entity is not merely a means of owning the real property, but is an operating business enterprise which owns the real estate in which it operates (but that’s a discussion for another time).
Going forward, the best practice might be to amend revocable trusts, if the clients so desire, to fix a time limit for the trust of up to 300 years. For irrevocable trusts, assuming the above interpretation of Subsection (d) is correct, nothing needs to be done except perhaps to append/insert into the trust records the change in the law and its effect on the perpetuities language in the trust. In some cases, a better approach might be to seek a court modification to state clearly the limit on the lifetime of the trust.
However, older trusts that are grandfathered GST trusts should be examined carefully in light of the Regulations so that the grandfathering is not lost inadvertently. It’s not clear to me at this point if this statutory change negatively impacts grandfathered trusts (such as being outside the safe harbors in Treas. Reg. § 26.2601-1(b)(4) if the parties seek a modification as allowed by the new statute. It’s also not clear to me whether this statutory change negatively impacts grandfathered trusts even if the parties take no action. All of that is a topic to be explored another day.