Estate Planning Update: Texas Overhauls the Rule Against Perpetuities

Estate Planning Update

Texas Overhauls the Rule Against Perpetuities

Texas Estate Planning attorneys, sit up and take note! The Texas legislature has revamped the Rule Against Perpetuities (or RAP) found in the Texas Trust Code §112.036 to be dramatically simpler – and in virtually all cases much longer. The rule goes into effect on September 1, 2021.

What is the Rule Against Perpetuities?

The Rule Against Perpetuities is a deceptively complex legal rule that (traditionally) states that no interest is good unless it must vest – if at all – no later than 21 years after a life in being at the creation of said interest. Charitable trusts, it should be noted, are generally exempt. The Rule Against Perpetuities has delighted law professors and frustrated law students since its inception. Let me unpack this for just a moment: If A wills property in fee to B, this is valid. The fee interest vests upon A’s death. If A wills property to B for B’s life, then in fee to C, this is valid. B is alive, and the fee interest to C will vest at the time of B’s death (who is alive at the creation of the interest). On the other hand, if A wills property to B for B’s life, then to B’s children for their lives, then to C’s heirs at law, the bequest to C’s children will fail because it could vest after 21 years from a life in being at its creation (suppose that B does not have children at the time of A’s death). There are some good policy reasons for the Rule Against Perpetuities. For example, it is against public policy to allow excessive “dead hand control” by long-deceased grantors from many generations ago. We want to promote the free use, allocation, and reallocation of capital and property among the members of society, and allowing perpetual restrictions would frustrate this and reduce overall utility. After all, why should we honor the instructions and limitations on a trust drafted by someone who lived in 1820? If you’re confused, don’t sweat it. First, you’re in good company – generations of law students have also been confused by the Rule Against Perpetuities. Second, Texas has your back, and has passed a law MASSIVELY SIMPLIFYING the Rule Against Perpetuities.

What Did Texas Do?

Amidst a legislative session that has seen the passage of several highly controversial laws, this one flew under the radar. And, to be honest, I can see how an update to Estate Planning rules wouldn’t exactly be cause for chanting in the streets or flipping over cars. Texas has replaced the “21 years from a life in being” and all the awkward calculations that that entails with a flat, easy to understand, 300 years. So, the new and improved Rule Against Perpetuities, Texas Edition is: no interest is valid unless it must vest, if at all, within 300 years of the creation of said interest. That’s easier, right? In a word, yes. And for pre-September 1, 2021 trusts, the old rule remains in force. Why do this? Some other jurisdictions have abandoned the common law Rule Against Perpetuities entirely, causing many Texas residents to create (sometimes very large) generational trusts in those jurisdictions to avail themselves of the dead hand control available in such jurisdictions. Perhaps Texas was tired of missing out on that revenue? Bottom line: there might be some hiccups with creating trusts for the next few years – so much of Estate Planning is built around avoiding the teeth of the Rule Against Perpetuities that you might see some uncertainties and oddities in trusts drafted over the next few years. Regardless, not many people live to be more than 289 years old. So this new and improved 300-year RAP should significantly extend the amount of posthumous control that can be exercised by Grantors, in just about every case that I can think of. Some So, law students, estate planners, and folks interested in protecting your assets and descendants, rejoice and congratulate the Texas legislature for simplifying the Rule Against Perpetuities.

But, Did They REALLY?

There’s one interesting limitation here, and a wrinkle here that should be mentioned. First, the law provides that real property may not remain in trust for longer than 100 years. It’s an interesting limitation. We’ll see how that goes. Second, this law revising the RAP was a “garden variety law” (HB 654). the Texas Constitution, which would, if in conflict, trump that law, states that “Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed” (Article 1, § 26). There is, oddly, an argument to be made that Texas has adopted the common law version of the Rule Against Perpetuities in the Texas Constitution, which trumps and invalidates HB 654. Stay tuned everyone, I smell some litigation to has this out coming up somewhere around, oh… a life in being plus 21 years from now. In the meantime, skillful drafting with lots of “in the alternative” may be the order of the day for Texas estate planning attorneys.

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