The Texas Constitution prohibits perpetuities: “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed….” Tex. Const. art. I §26.
Well okay, but what exactly is a perpetuity? Simplistically stated, a perpetuity is a restriction on the power of alienation of an asset that lasts longer than a prescribed period. Historically, in Texas (and most other common law jurisdictions) the rule against perpetuities renders invalid any conveyance, will, or trust that attempts to create any estate or future interest (in either real or personal property) which by any possibility that the asset will not vest within a life or lives in being at the time of the testator’s death and twenty-one years thereafter (and possibly another 9-months).
Confused? Join the club. In law school, the standing joke is that “only three people ever understood the rule against perpetuities: the first died; the second forgot; the third went crazy.”
But anyway, the rule is there – and it was originally meant to put a restriction or check on vain and wealthy empire builders who would tie up land and assets under complex trust agreements managed by far-away people (these actions sometimes called by lawyers as “dead-hand” control).
Some states have abolished or modified the rule, including Wyoming, which, as discussed below, is getting undeserved negative attention. Once abolished, the door is open to establishing trusts in perpetuity (forever trusts, as I call them). The reasons for modifications and abolishment are varied, but include the following:
- If my state law abolishes the rule, then vain and wealthy individuals that have been so long villainized may be inclined to choose my state in which to do business. And vain and wealthy individuals have plenty of money – simply stated, it is a business generator and a good business generator. A dollar paid by a vain and wealthy individual is just as valuable as a dollar paid by a pious and less wealthy individual. Welcome, vain and wealthy people!
- If property is tied up in trust for 100-300 years, there will be no federal estate taxes (a tax I abhor). The taxable event causing an estate tax liability is the death of an individual. But trusts do not die, so if they can exist for 100-300 years, the trust assets will never be included in an individual’s estate for estate tax purposes.
- It is a tool for hiding wealth and the ownership of wealth. Cynically, forever trusts can be a vehicle for “money-laundering.” Factually, the transfer of assets out of the hands of an individual may then “free up” that individual to qualify for “means restricted” federal aid, because he or she can state, with some truthfulness, that his or her net wealth is significantly less than the day before his or her property was transferred into a trust. As well, trust assets are often exempt from foreclosure by former spouses, debt collectors, and the like.
Wyoming is the “poster child” for the villainization of “forever trusts.” Using enticing phrases like “Cowboy Cocktail;” advertisements promoting business like “Wyoming, the new onshore offshore;” and describing forever trusts as “Wyoming home cooking;” do not help (except perhaps assistance to those who are promoting trust creations in Wyoming). Allegations that less than honorable foreigners (think Russian strongmen, unscrupulous Argentinian businesspeople, and my personal favorite, third-world dictators) are using “forever trusts” to hide assets obtained in a less than scrupulous manner, do not help, either.
But this is not a “red” state versus “blue” state issue. California, which would gag if viewed as a “fellow traveler” of Wyoming, has, by statute, allowed trusts to last for about 90-years. Delaware and Florida have made similar revisions to their laws and now provide for “near” forever” trusts.
We suspect legislators favor “forever trusts” because they are sympathetic to constituents who fear a “whooping” federal estate tax diminishing the value of the legacy they wish to leave their children. Those legislators, perhaps being the unwitting tools of those who advocate for “forever trusts for nefarious reasons” – well, that is a pretty good recipe or cocktail for the enactment of “forever trusts.” They are the “wave of the future.”
TEXAS JOINS THE CLUB
Recently passed HB 1296 (codified as a revision to Texas Trust Code Section 112.036 or Tex. Prop. Code §112.036) revises our laws to provide that an interest in a trust must vest not later than 300-years. There is also a limitation on the creator of a trust (referred to by lawyers as the “settlor”) directing that a real property asset be retained or refusing that a real property asset may be sold for a period longer than 100-years. Be it a 100-years or 300-years, either is a long time.
I suspect there will significant legal challenges: first, can the Legislature [arguably] amend the Texas rule on perpetuities, embodied in our Constitution, by statute? If not, expect to see a ballot proposition to revise the Constitution one-day in the future. Further, irrespective of your views on our Texas Legislators, an eighth grade English teacher would challenge most. Their grammar and clarity skills are something less than stellar. So, look to future lawsuits on just exactly what that new code section really means; particularly if “real” money is involved.
WHAT TO EXPECT
You may expect to see “forever trusts.” Aside from obvious advantages like insulation from ex-spouses and creditors and reducing one’s estate to qualify for government benefits, there will be those who use “forever trusts” to avoid Federal Estate Taxes, both real and imagined. As of now, estate taxes only attach to a couple’s estate when it exceeds $24,000,000. But when it kicks in, it kicks in with vengeance, at 40%. So, a $26,000,000 estate would owe a tax liability of $800,000 (the $2,000,000 in excess of the $24,000,000 exemption times 40%). And, as we know, there are efforts in Congress to lower the tax exemption. The legal fees for drafting and implementing a forever trust pale in comparison of an anticipated $800,000 tax bill. This will happen.
Remember, that the lawyers that draft trust agreements are focused on lawful tax avoidance, often paying scant attention to the long-term effects on property laws and public records. That is not their focus. And income taxes are still due on income generated by trust assets. So, expect to see non-income producing assets, such as growth stocks that do not pay dividends, tax-free municipal bonds, and real estate that may not generate a lot of income but appreciates, over time, substantially.
WHAT TO DO?
As good real estate professionals, we first must commit to proper contracting with trustees. Things like a proper signature block (_______, as trustee of the _________ Trust), proper recordation in county courthouses of contracts affecting real estate, securing a copy of the trust agreement and its amendments, and documenting the initial trustee and all successor trustees (in writing). The recordation of trust documents and documents creating successor trustees is enhanced in importance. In 300-years, which is more likely: finding the records of a trustee that died 250-years ago, or finding the public records of the county where the land is located? Both may be a problem, but I suggest the latter will be far easier than the former.
You can bet your bottom dollar (whatever that means) that over the course of 100-years, there will be numerous successor trustees. As well, do not expect a corporate trustee to last forever. Remember, Texas Commerce Bank, well it is now part of Chase Bank; and remember Chase Bank, it is now part of JP Morgan Chase Bank. Corporations are often viewed as eternal, but they are not: Standard Oil Company of Indiana (Amoco) is not a small part of BP; Standard Oil Company of New York (Mobil) is now a part of ExxonMobil Corporation. Things change – and documentation will be key. To say the least, you will feel slightly embarrassed when you lease the “wrong” trustee.
REVISIONS TO THE TEXAS PROPERTY CODE?
Embodied within the Texas Property Code is the Texas Trust Code. To a considerable extent, it is a model of simplicity. But in light of these new “forever trusts,” it may be time to work at some revisions, such as the following:
- PROP. CODE §112.054 provides for the judicial modification or termination of trusts. However, the request for such action must be initiated by a trustee or a beneficiary. As regards beneficiaries, bear in mind that 150-years after a person creates a trust, that person can expect to have 450 descendants, according to Law Professor Larry Waggoner. (See Professor Waggoner’s 2010 report, written for the American Law Institute.) So, good luck trying to get 450-descendants to petition a trustee to take a specific action! Fortunately, any one of the 450-descendants can make the petition but remember finding the other 449 for service of process will be challenging (and expensive); and do you want the beneficiary of .000001% of the trust being able to wreck judicial havoc “just for the fun of it.” Also, do you want to allow those who “contract with the trustee or trust” to be able to request “modification, termination, or clarifications”? Candidly, weighty issues for the legislature.
- PROP. CODE §113.001 et seq sets for statutory authorities of a trustee. However, these statutory authorizations can be amended by the terms of the trust agreement to restrict or enlarge the trustee’s powers. But what if (and in 100 or 300 years a likely “if”) the document creating the trust cannot be found, even after a deliberative and good faith search? Should we have a statute creating a “safe harbor” for trustees and those who contract with the trustees in that instance; or perhaps another court proceeding wherein the trust creating instrument is officially deemed “lost” and that the provisions of our trust code will therefore apply? Again, weighty issues for the legislature.
This new law on the perpetuation of trusts will have a drastic effect on the operation and termination of trusts in Texas as it changes Texas’s historical treatment of trusts and the rule against perpetuities. Attorneys who draft wills and trusts will undoubtably be aware of this statutory change and discuss with settlors [those who create trusts] how long the settlors want a trust to last and when it should terminate. For those settlors that want long-term trusts, they now have the power to have them last 300-years after the effective date of the trust (perhaps for real estate, only 100-years). Though not perpetual, 100 or 300 years is still a long time.
For real estate professionals who deal with or contract with trustees, especially real estate professionals working within the oil and gas industry, the work just got harder and more complex. Establishing and documenting the proper trustee will be time-consuming; obtaining and reviewing the instrument that created the trust for its terms just got more important; and making sure that the documents creating the trusts and amending the trusts, as well as the documentation of successor trustees, are properly maintained and recorded in the public records just became more critical.
by Jack M. Wilhelm
Edward Wilhelm and Jack Wilhelm provide tremendously high value legal assistance to many very desirable clients.
THE WILHELM LAW FIRM, 5524 Bee Caves Road, Suite B5, Austin, TX 78746; (512) 236 8400 (phone); (512) 236 8404 (fax); www.wilhelmlaw.net
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