The benefits of a dynasty trust for long-term wealth planning are no secret. Dynasty trusts combine important protections against creditors and divorce, as well as tax savings, with a long or unlimited duration, making them an invaluable tool for estate planners. In Texas, however, a long-standing law placed strict limits on the actual length of time that dynasty trusts could last. That is, until now. A newly enacted revision of the law now allows trusts in Texas to last for 300 years.
Prior Law
Before this new law, the Texas rule against perpetuities provided for an exacting (and somewhat convoluted) way of determining just how long a dynasty trust could endure. The rule permitted trusts to last no longer than the lifetime of anyone alive at time of trust creation who was identified in the trust (known as a “measuring life”), plus 21 years. For instance, if the youngest measuring life of a newly created trust was a baby who then lived to 80, then the maximum length of such a trust would have been about 100 years.
Accordingly, Texans wishing to create a longer-term trust have historically created the trust under the law of another state (such as a perpetual trust in Delaware, South Dakota or Alaska, or a 365-year trust in Nevada). To do so required naming a trustee in that chosen state. Now, Texans have the choice of keeping their trusts at home. There are still other protections that may favor creating an out-of-state trust in certain situations, but if the only concern is duration, a Texas trust is now an option.
300-Year Trust Allowed
The new law allows trusts to last up to 300 years from the effective date of the trust and applies to trusts with an effective date on or after Sept. 1, 2021. If your client creates an irrevocable trust during their life, the effective date is the date the trust is created. If your client’s will or living trust provides for trusts that will be activated on their death, then the effective date will be their date of death.
Two Exceptions
It’s important to note that there are two significant exceptions to the law. The first, which also existed under the previous version of the law, is that charitable trusts aren’t subject to any durational limitations. The second relates to trusts holding real property assets. The new law includes a provision that precludes a trust from being used to retain or otherwise tie up a real property asset for longer than a period of 100 years.
Trust Amendments
For existing revocable trusts that don’t become irrevocable until after Sept. 1, 2021, the trust can be amended to extend the term under the provisions of the new law. The trust would need to be amended to include language stating that “an interest in the trust vests under the provisions of Section 112.036 applicable to trusts on the date that the interest vests.” Those clients who have a will or living trust currently in place that provides for a trust to be activated on their death will need to have their documents amended to take advantage of the new law’s provisions.
For established irrevocable trusts created before Sept. 1, 2021, there are certain procedures that could potentially allow for the trust to be modified to take advantage of the new longer duration. While estate planners are currently exploring those procedures and the ways in which they could be used, the analysis should take place on a trust-by-trust basis, taking into consideration the facts of each case.
Potential Challenge
Interestingly, there are some who believe this law could be challenged for potentially violating a provision of the Texas Constitution prohibiting perpetuities: “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed…” (Article I, Section 26 of the Texas Constitution). It’s unclear if this law will be seen as allowing perpetuities in opposition to the Texas Constitution or rather will be seen as more clearly defining the length of an allowable duration within constitutional parameters.
Regardless of the uncertainties that are typical whenever a long-standing law undergoes a substantial revision, one thing is quite certain: Texans can act now to take advantage of the change. By amending current estate plans or establishing new trusts, having a true Texas dynasty trust can finally become a reality.
