The Lone Star State Might Become the Lone Trust State

Texas House Bill 372 died quietly at the end of the legislative session last month.  The proposed bill would have modifed Texas Property Code § 112.036, -- essentially the common law rule against perpetuities (lives in being plus 21 years -- remember that?) -- in favor of a 200 fixed-year term.  Presently there are only seven U.S. jurisdictions that retain the common law RAP (New York is one of them). 

Texas bankers have been lobbying for years to try to get the state to change its approach.  Their motivation?  Money.  As Rob Sitkoff and Max Schanzenbach have documented (here, e.g.), trust funds flow out of common law RAP states to jurisdictions that have relaxed or eliminated the rule altogether.

It is unlikely that Texas ever will go the perpetual trust route.  Indeed, the Texas Constitution prohibits perpetuities as "contrary to the genius of a free government."  But absent some reform, trust business (and jobs associated with that business) will continue to go elsewhere.  Among law professors, serious debates (see, e.g., here) engage questions about the morality of ultra long-term and perpetual trusts.  "Race to the bottom" is a phrase that comes up frequently.  The fate of the Texas bill makes me think that there's a "race to unemployment" factor that wasn't on the minds of state legislators, though.

Comments

[Matthew Reid Krell]

Speaking as a trustee, would you mind enlightening us offhand as to the seven states that follow the common-law RAP?

[Bridget Crawford]

Alabama, Iowa, Mississippi, New York, Oklahoma, Texas, Vermont.

[Bill Turnier]

Given that, after a hundred years or more, a growing family typically outstrips the trust resources once one factors in income taxes, inflation, trust administration fees and rising expectations, these trusts are going to resemble the small fields surrounded by stones that one sees on the Aran Islands (and elsewhere in Ireland). These were the result of British laws that required that fields be ever and again divided equally among heirs. At least they now attract tourists like me to marvel at them, hike the islands and raise a pint or two and spend a night or more in a B&B before leaving. I cannot imagine bank trust departments attracting much tourist traffic. Clearly there is need to include language in such trusts providing for termination at some point in time.

[Josh Tate]

The loss of trust business to other states was very much on the minds of the state legislators. It was the main topic at the committee hearing. The legislators who support the bill don't view the constitutional provision as a problem, because there would still be a 200-year limit. The reason why the bill continues to fail is that the Texas legislature meets only every other year for half the year, and it is hard for anything to get through unless it is either completely uncontroversial or a key part of the majority party's agenda. Many bills fail even if they fall into one of these categories.

I don't know if the committee hearing is still archived on the Texas House website, but it is very interesting to watch. One legislator admitted that he agrees with the policy behind the RAP but would vote to repeal it anyway because if you can do it in another state you should be able to do it here.