Perpetuity Provisions

Texas Competing with Other Trust-Friendly States

Texas Trust Code changes over the last 20 years seem to be attempts to compete with Delaware, South Dakota, Alaska, and other states as it pertains to irrevocable trusts. The Texas legislature in 2021 added a procedure to modify the provisions of irrevocable trusts.

Changes to the Rule Against Perpetuities (RAP)

One of these provisions in the Texas Trust Code changes the rule against perpetuities (RAP). Prior to September 1, 2021, an existing irrevocable trust had to terminate within 21 years after some life in being at the time of the effective date, plus a period of gestation.

The revised RAP, effective September 1, 2021, provides that a trust must terminate within 300 years after the effective date of the trust. The exception is that real estate has to be disposed of within 100 years.

Application of the Revised RAP

However, the 2021 legislation provides that the RAP rules in place prior to September 1, 2021, would stay in place for trusts executed prior to that date. That means only new trusts get the benefit of the revised RAP provisions.

There is one exception. If a trust executed before September 1, 2021, includes the new RAP provisions, then the new rules apply to that trust. That seems ambiguous to me. Maybe a pre-2021 trust agreement has springing provisions.

Self-Settled Irrevocable Trusts

Self-settled irrevocable trusts are allowed in some states. That means a settlor of a trust can place their own assets in an irrevocable trust while remaining a beneficiary of the trust, and still receive some legal protections.

Final Thoughts

If I were going to draft a dynasty trust, I would consider using Delaware or another trust-friendly state. Establishing a Texas irrevocable trust is like landing a plane on a landing strip with bomb craters.