Texas Dynasty Trusts: The Rule Against Perpetuities Changes

The Texas legislature has recently amended the rule against perpetuities in its statutes. Is this change be constitutional? Texas case law, other states’ experiences, and a strong scholarly debate can all shed light on the issue and offer advice for trust-drafting practitioners.

A Holdout

For years, Texas remained one of the few states that kept the common law rule against perpetuities standard in its probate code. “The Rule” forbids individuals from creating future interests in property that would vest after 21 years following the lifetimes of the living beneficiaries at the time of its creation. More than just a bane for law students, this rule seemed to limit the economic output and potential of the state. A 2003 study found that states that abolished the rule against perpetuity had a $100 billion increase in trust fund assets. Twenty years later, it’s clear that retaining this rule disadvantages Texas. While other states have relaxed or abolished the perpetuities rule, Texas missed out on the many benefits of dynasty trusts: greater tax planning, the ability to shield assets from beneficiary creditors, and increased security in one’s estate plan. 

Allowing Dynasty Trusts

Following ConocoPhilips Company v. Koopmann, which relaxed the common law and constitutional rule against perpetuities, the Texas Legislature passed HB 654 late last year. The bill rewrote section 112.036 of the Property Code, replacing the previously codified common law rule with the following:

(c) An interest in a trust must vest, if at all:

(1) not later than 300 years after the effective date of the trust, if the effective date of the trust is on or after September 1, 2021

The amendment does away with the “life in being plus twenty-one years” common law rule and makes Texas a dynasty trust state. Trusts created in Texas can now pass wealth from generation to generation without incurring transfer taxes and avoiding the scrutiny of creditors. While welcome news to estate planners and grantors, this development has one hiccup: its potential unconstitutionality. 

Texas Constitution and Perpetuities

Section 26 of the Texas Bill of Rights explicitly prohibits perpetuities and monopolies, stating: 

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.

One has to question whether the modification of section 112.036 of the Property Code complies with this constitutional provision. The drafters of section 26 may have envisioned the common-law rule against perpetuities to limit the generational passing of wealth. This interpretation would prevent the remote vesting of property interests past the prescribed period. On the other hand, the framers of the constitution may have intended to limit the time a property loses its alienability. If the trustee may put the property on the market for commerce without restriction (after the prescribed period), it could still exist in the trust. Depending on how the constitutional provision is interpreted, extending the rule against the perpetuities to 300 years may be unconstitutional. Believing in the alienability interpretation of perpetuities, the senate added the following provision before passing HB 654: 

(f) 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.

This inclusion makes a 100-year alienability requirement for grantors, forcing their trusts to allow the trustees to alienate (or sell) the trust’s real property after 100 years. The provision demonstrates a continued barring of limiting alienability and thus attempts to render the 300-year period constitutional. Despite this inclusion, the constitutionality of the change should be examined. Fortunately, the Texas Supreme Court has seemed open to allowing modifications to the Rule. 

ConocoPhilips Co. v. Koopmann: Opening the Door to Change

The recent decision ConocoPhillips Co. v. Koopmann, 547 S.W.3d 858, 867 (Tex. 2018) concerns the constitutionality of the new rule against perpetuities. The case concerned the validity of an oil and gas royalty agreement. The agreement granted a deed that could extend as long as there is “production in paying or commercial qualities”. The complainants argued that the executory interest agreement violates the rule against perpetuities and thus should be found void. The Supreme Court disagreed; its ruling narrowed the application of the rule against perpetuities. Their opinion expressly stated:

The Texas Constitution does not define “perpetuities,” and without a statute on the subject, the common law on the matter is the law of the state.

With this assertion, ConocoPhilips opened the opportunity to amend section 112.036 of the Property code and redefine the term “perpetuity.” Given that  “constitutional construction is a matter for the courts,” the judges implied that they might accept a statutory change to define section 26 of the Texas Constitution. With this ruling, many jurists believe the new 300 year rule will stand up to judicial scrutiny. 

In its judgment, the Court wrote that the purpose of the Rule was to prevent landowners “from using remote contingencies to preclude alienability of land for generations”. The court highlighted that the Rule was meant to prevent the fettering of a property’s marketability for long periods of time. In short, the constitution meant to protect property’s alienability; it did not have the purpose of preventing remote vesting. The restraint on the alienability of land and the goal of promoting the land’s productivity is not triggered for oil and gas projects and royalties, as the royalty deed incentivized further productivity and alienability of the land. 

The court considered the “future interest” of the royalty “vested” in Koopman, thus not violating the rule. In the final sentence of the ruling, the Supreme Court clearly stated that they “limit [the] holding to future interests in the oil and gas context in which the holder of the interest is ascertainable and the preceding estate is certain to terminate.” While seemingly narrowing the Rule to alienability and granting an exception to oil and gas commercial contracts, the court is reluctant to extend the exception to other areas of ownership. This holding is insufficient to confirm the constitutionality of the new section 112.036.

With the uncertain constitutionality of this change, perhaps the best answer can come from other jurisdictions and how they interpreted the constitutionality of their dynasty trusts. 

Nevada: Bullion Monarch v Barrick Goldstrike

The recent Bullion Monarch v. Barrick Goldstrike, 131 Nev. 99 (2015) case tackled the same issue as ConocoPhilips and questioned whether a statutory rule against perpetuities was constitutional in their state. Much like Koopmann, Bullion Goldmine was entitled to a 99 year royalty from Barrick for the latter’s mining production in a given area. Barrick argued that the 99 year period broke the constitutional and common law rule against perpetuities, despite adhering to the 365 year statutory term. Since the Nevada Constitution at the time of its creation would have outlawed the 99 year commercial agreement, it should remain unconstitutional today. 

The Supreme Court disagreed. In their opinion, the Constitution did not precisely define perpetuities and instead found that 19th century legal dictionaries envisioned perpetuities as applying to donative transfers rather than commercial ones. Much like in ConocoPhilips, the court reasoned that commercial transfers dealing with oil and mining royalties do not go against the original intent of the constitutional provision, which sought to limit the excessive dead-hand control of property kept within families throughout generations. The royalty deed only increased productivity of the land, since it can be exchanged, bought, or sold; thus, the rule against perpetuities does not apply. 

By limiting themselves to the commercial oil and gas industry and royalties, the Nevada Supreme Court did not overtly assess the constitutionality of the 365 year statutory rule. Nonetheless, it gave a strong indication that the statutory rule was valid. 

North Carolina: Brown v Benson

North Carolina had to struggle with the same issue concerning the constitutionality of changing the rule against perpetuities. Brown Bros. Harriman Tr. Co. v. Benson, 202 N.C. App. 283 (2010) involved a decedent’s trust beneficiaries asking the trust for immediate distribution, alleging that the Benson trust violates the common law (and constitutional) rule against perpetuities. The trustee sought declaratory relief stating the statutory Rule in section 41-23 was constitutional. The defendant argued the statute’s argued that the North Carolina courts already recognized that the common law rule against perpetuities and its restriction of the remote vesting of future interests was constitutionally required. The Court of Appeal agreed with the trustees, stating that previous cases: 

Recogniz[ed] the common law rule as a tool utilized to implement the constitutional prohibition of perpetuities by preventing restrictions on alienation from lasting for an unreasonably long period.

The Court supported this position by recounting the statements of the Constitutional framers and the 1820 Supreme Court’s description of perpetuity as the mechanism which prevents situations where there is no potestas alienandi (alienation) in the owner. The common law rule addressed the issue of alienability of property indirectly by regulating vesting of trust property interests, but a statutory provision that directly suspends or limits the right of alienation would also be constitutional. 

This case suggests that courts have understood the purpose of the rule against perpetuities to be the prevention of inalienability of property, thus allowing statutes that extend the time frame for vestment. With Texas court’s similar view in ConcoPhilips, this rationale would likely be mirrored if a Texan court analyzed the constitutionality of section 112.036 of the Property Code. Despite these judicial trends, how else might the court rule?

Alienability or Remoteness? Legal Scholars Debate

Some legal scholars have criticized allowing dynasty trusts by focusing on alienation rather than vestment. They argue that the rule against perpetuities did not target the alienation of property alone. Steven Horowitz and Robert Sitkoff argue that alienability for perpetuities does not simply refer to the alienation of the property, but the alienability of the beneficial ownership. The constitutional rule against perpetuities was meant to prevent the creation of a perpetual string of “inalienable beneficial interests down the generations” or dynastic trusts themselves. The two legal scholars criticize the court in Benson for limiting the constitutional rule against perpetuities to the alienation of property. In their view, its original purpose was to prevent the creation of an equitable fee tail which the settlor controls indefinitely. 

Professor John Orth also commented on the Benson trial by demonstrating North Carolina constitution referenced three rules when it outlawed perpetuities. First, the framers attempted to limit or abolish fee tail in favor of fee simple. Secondly, they attempted to keep property alienable with a rule against alienation. Thirdly, the rule against perpetuities prevented or limited remoteness in vesting. In his opinion, the constitutional prohibition covers all three. Only by changing the definition of “perpetuity” could dynasty trusts be considered constitutional. 

In contrast, others have critiqued these approaches and backed the judiciary. Raatz argued that Holowitz and Sitkoff misinterpreted the constitutional rule. He highlighted that most state courts have allowed the legislature to interpret the constitution and modify the rule against perpetuities. Nevada (through Bullion v Barrick), California, Arkansas, and Oklahoma legislatures have all narrowed the definition of perpetuities and were legally able to do so. They may choose to apply or negate the Rule Against Remoteness, as long as the preventing the alienability of property is restrained. Since the historic purpose of the Rule Against Perpetuities was to avoid excessive restraints on the marketability of property, it was not meant to enshrine a restraint on remoteness. Defining the Rule should be left to the legislature, interpreting otherwise would be advocating for judicial activism. 

Finally, William Pargaman and Meredith McIver give a detailed analysis of the constitutionality of the Texas reform. They cite many cases that previously used the common law rule synonymously with the constitution  (See Anderson v Menefee 1915, Neely v Brogden 1922, Clarke v Clarke 1932), and thus how ConocoPhilips is an outlier. They highlight how the Texas Constitution does not explicitly allow the legislature to define “perpetuity” or “vestment” as it does for other constitutional provisions. Ultimately, given the unbinding holding of ConocoPhilip‘s comment on article 26 of the Constitution and a lack of legislative authority to define constitutional terms, the validity of the new section 112.036 may need to be reviewed in court. 

Texas Conclusion

What does all this mean for Texas? Generally speaking, state courts tend to defer to the legislature when modifying the Constitutional Rule Against Perpetuities. Legal scholars are split on how to treat perpetuities: either as a question of alienabilty or remoteness in vesting. Based on the current case law, courts tend to accept the former interpretation and allow a narrowing of the common law rule. If Texas follows this trend, section 112.036 would be found constitutional. Nonetheless, those drafting trusts should be aware of the possibility of litigation on this issue. 

ConocoPhillips (like Bullion) has accepted the narrowing of the Rule to exclude royalties on oil, gas, and other commercial contracts but has not directly endorsed new definitions of perpetuities. While open to accepting the constitutionality of modifying the common law Rule, these modifications are not without limit. If the court finds the statute does not do enough to limit the reservation of alienability or that perpetuities include an element beyond alienability, then many Texas dynasty trusts may be found void.

Takeaways for Drafters

Before a definitive ruling surfaces, Texas attorneys drafting trust documents should advise their clients of the uncertain legal status of dynasty trusts and take every precaution to draft alternatives in case section 112.036 is litigated. Nonetheless, the court has certainly laid the ground in ConocoPhilips to approve the legislature’s own view of the rule. Estate planners and trust drafters should ultimately opt to include dynasty trusts where appropriate and with appropriate caveats. 

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