Perpetuities: How about 200 years?

The Wealth Management and Trust Division of the Texas Bankers Association (the TBA) has tried to repeal or extend the rule against perpetuities as it applies to trusts in past sessions, and it appears that it is going to try again.  HB 372 and SB 261 would amend Section 112.036 of the Texas Trust Code to permit trusts to last for 200 years.

Will Hartnett, Author of HB 372

The companion bills were filed by Rep. Will Hartnett (R-Dallas) and Sen. John Carona (R-Dallas).

Like most states, Texas follows the traditional rule against perpetuities.  The rule is codified in Section 112.036 of the Texas Trust Code:

The rule against perpetuities applies to trusts other than charitable trusts. Accordingly, an interest is not good unless it must vest, if at all, not later than 21 years after some life in being at the time of the creation of the interest, plus a period of gestation. Any interest in a trust may, however, be reformed or construed to the extent and as provided by [Property Code] Section 5.043.

In the past 15 years, several states have either abolished the rule against perpetuities or greatly extended the permissible duration of trusts.  Ironically, it was the enactment of the generation-skipping transfer tax (GST) -- which was intended to curb the use of multi-generational trusts to avoid estate taxation -- that appears to have spawned the interest in abolishing the rule.  Lifetime transfers of a certain amount of property are exempt from the GST (currently $5,000,000), and many Americans have created multi-generational trusts to take advantage of this exemption.  Apparently, many of those Americans see no reason why those trusts cannot last forever (or a really long time), and they have urged state legislators to abolish the rule.

John Carona, Author of SB 261According to a chart prepared by Elizabeth Schurig and Amy Jetel of the Austin firm of Schurig Jetel Beckett Tacket in 2007, at least 18 states have abolished the rule against perpetuities or extended it by many years, including Alaska (1,000 years), Arizona, Colorado (1,000 years), Delaware, Idaho, Illinois, Maine, Maryland, Missouri, New Hampshire, New Jersey, Rhode Island, South Dakota, Tennessee (260 years), Utah (1,000 years), Washington (150 years), Wisconsin and Wyoming.

A paper by Robert Sitkoff of Harvard Law School and Max Scanzenbach in 2008 lists 23 states as having "abolished" the RAP.  The Sitkoff/Scanzenbach paper used different criteria in adding Florida (360 years), Nebraska, North Carolina, Ohio, Pennsylvania and Virginia to the list and leaving Tennessee and Washington off the list.  The Sitkoff/Scanzenbach paper also gives some idea of the pace of adoption of anti-RAP legislation: 

• Before 1985:  3 states
• 1995-1999:  9 states
• 2000-2004:  8 states
• 2005-2007:  3 states

The paper was written in 2008, so it does not report legislative activity since 2007.

TBA believes Texas banks and trust companies are put at a competitive disadvantage because Texas still follows the rule.  Smaller banks and trust companies -- that have no out-of-state branches or affiliates -- are particularly hamstrung.  Wealthy Texans can create perpetual trusts now, but they must use an out-of-state bank or a big, national bank with offices in non-RAP states.  

Also, TBA believes the passage of the bill would simplify the rule by putting all trusts on equal footing with a simple term of years.  Further, the bill would end “RAP games,” where some attorneys incorporate the Kennedy or Royal families as the measuring lives.

The TBA has tried at least twice before to abolish the rule against perpetuities or extend the permissible duration of trusts.  In each case the legislation failed to pass.

Stephen Saunders, an Austin attorney, has opposed RAP repeal/modification legislation in the past and is opposed to  HB 372 and SB 261.  Mr. Saunders thinks that the RAP is good public policy -- and has been for 400 years.  He thinks modifying or repealing the RAP would have far-reaching consequences, including a reduction in charitable giving and increased litigation.  Also, he says, it would be bad social policy and tax policy.  Here is his 2003 paper giving reasons to leave the RAP alone.

The task of abolishing the RAP is more daunting in Texas because of the state constitution.  The Bill of Rights (Article 1, Section 26) provides:  "Perpetuities and monopolies are contrary to the genius of a free government, and shall never be allowed...."  It seems clear that the outright abolition of the rule against perpetuities would require a constitutional amendment.  Does substantially lengthening the permissible duration of trusts (in the typical case, 200 years is more than twice as long as the current limit) raise constitutional concerns?