Texas Extends Rule Against Perpetuities to 300 Years
The Rule Against Perpetuities is the bane of every first-year law student’s existence. It provides: no interest is good unless it must vest, if at all, no later than 21 years after some life in being at the creation of the interest.
The rule is concise but complicated. For example, if Jason devises property to John for life, then to John’s children for their lives, and then to Jane, the devise to Jane is valid because she is a life in being when the interest is created. However, if instead, Jason devises property to John for life, then to John’s children for life, and then Jane’s children then living, the devise to Jane’s children is void because there is a possibility that the interest of Jane’s children may not vest within 21 years of a life in being at the creation of the interest.
Oh, and did I mention the “fertile octogenarian?” Basically, it’s the legal fiction at common law that a woman at any age is capable of having children for purposes of determining the applicability of the rule against perpetuities. I had stress dreams about problems related to the rule against perpetuity long after law school.
How Does the Rule Against Perpetuities Apply to Trusts?
For all practical purposes, the rule invalidates any trust that attempts to control interest in certain property for too long of a period after the person creating the trust died. As a result, trusts created in states that ascribe to the rule against perpetuities must terminate within a prescribed period; specifically 21 years after a life in being at the creation of the interest.
Most states have abolished the rule against perpetuities because of its complexity. Additionally, there is a growing interest in retaining assets in generational trusts for wealth preservation and asset protection purposes. Currently, there are just a handful of states still clinging to this rule. Texas is one of them. But that’s about to change.
The New Rule
The Texas legislature passed a bill that extends the rule against perpetuities to 300 years for trusts other than charitable trusts. Governor Greg Abbott signed the bill on June 16. The new rule goes into effect on September 1, 2021.
Trust companies competing nationwide for trust businesses lobbied the legislature. They pointed out that citizens interested in unitizing long-term trusts for estate planning purposes were creating trusts in states that had abolished the rule against perpetuities. This put Texas at an economic disadvantage.
Under the new rule, the permissible duration for a trust to exist is now 300 years. Section 112.036 of the Texas Property Code, as amended, provides that an interest in a trust must be acquired, if applicable:
- 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
- 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.
Paragraph (d) provides that an interest in a trust that has an effective date before September 1, 2021, may extend for 300 years 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.
What is the Effective Date of the Trust?
The effective date of the trust is the date on which the trust becomes irrevocable.
If you create an irrevocable trust during your life, the effective date of your trust will be the date on which you execute the trust document. However, if your Will or Revocable Trust provides that trusts will be created for beneficiaries after your death, the effective date of your beneficiaries’ trusts will be after your death.
Article I, Section 26 of the Texas Consitution provides: Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed; nor shall the law of primogeniture or entailments ever be in force in this State.
Experts argue the Texas Consitution essentially adopts the common law version of the Rule Against Perpetuities, which conflicts with the statute as amended. It will be interesting to see how the Texas Supreme Court reconciles this apparent conflict, but this may take years.