New IRS position could lead to gift tax consequences in trust modifications and decantings

Taken to its somewhat illogical conclusion, Chief Counsel Advice 202352018 (issued November 28, 2023, released December 29, 2023) could lead to gift tax consequences for beneficiaries of trusts which are modified or decanted in a way that alters beneficial interests in a trust.  Modification of administrative, nondispositive trust provisions should not be affected.

In CCA 202352018, the IRS took the position that beneficiaries’ consent to a trust modification of a defective grantor trust to give the trustee the discretionary power to reimburse the settlor’s income tax payments constituted “a gift of a portion of their respective interest in income and/or principal” of the trust.  While the beneficiaries consented to the modification in the case to which the CCA applies, the CCA provides that “the result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”

This is an IRS position, not a court determination.  Still, it could cause concern in cases where a trust is modified or decanted in a way that diminishes the beneficial interest of a beneficiary of the decanted trust.  If the beneficiary consents or does not object to the modification or decanting, he or she could be deemed to have made a gift of a portion of the income or principal of the trust.

Texas Trust Code Section 112.054 – the judicial modification statute – does not require the beneficiary to consent to a modification, but it does make the beneficiary a necessary party, and the beneficiary is entitled to initiate the modification action. Perhaps having the trustee initiate the proceeding and having the beneficiary file a general denial or other non-consenting response will overcome the implications of CCA 202352018.  But trustees are sometimes reluctant to initiate modification suits.  This might be a good use of a trust protector, who could direct the trustee to seek the modification, taking away the trustee’s discretion and overcoming their reluctance to proceed.

Texas Trust Code Section 112.074 – part of the Texas decanting statute – requires notice to beneficiaries of a decanting.  This might be enough to cause the CCA to apply unless the beneficiary objects to the decanting.

A combination of trusts under Texas Trust Code Section 112.057 may avoid the CCA trap because the combination must not “impair the rights of any beneficiary or adversely affect achievement of the purposes of the trust.” If a beneficiary’s rights may not be impeded, then presumably he or she will not be making a gift of a beneficial interest in the trust. 

Often the modification, decanting or combination of a trust is undertaken to solve problems with the administration of the trust, not to change the beneficial interests in the trust.  For example, a modification which changes the trustee succession provisions of a trust or changes the situs of the trust should not be affected by CCA 202352018 because the trustee remains subject to the same duties to the beneficiaries and the beneficial interests remain the same.

Tax-free amounts for 2024

The tax-free amount for estates and the gift tax exclusion amounts are indexed for inflation, so they adjust each January 1.  For a person dying in 2024, an estate tax return is required and estate tax may be due if the decedent’s estate exceeds $13,610,000.  This is a $690,000 increase over the 2023 tax-free amount of $12,920,000.

The gift tax exclusion amount is the amount a person may give to a donee without having to file a gift tax return.  It is increased to $18,000 for 2024 gifts, up from $17,000.

For married persons, it may be a good idea to file an estate tax return even if the estate does not exceed the tax-free amount.  Doing so allows the deceased spouse’s unused exemption amount to be assigned to the surviving spouse.  The surviving spouse can add the unused exemption amount to his or her own tax-free amount, increasing the amount of property which may be left to family when the surviving spouse dies.

Unless Congress changes the law, the tax-free amount will be cut in half for persons dying in 2026 or later.  Thus, it will be closer to $7,000,000.  See the blog entry “Avoiding falling off the 2026 cliff” below for more information.

2023 Legislative Update

1.      Introduction

The 88th Texas Legislature passed several bills which affect probate, guardianship and trust law. None of the changes were earth-shattering (earth-shattering like 2021’s 300-year rule against perpetuities bill; there’s a fairly low threshold for “earth shattering” when discussing probate legislation) but there are measures which will make the practice of law in this area easier and a few cautionary changes to be wary of.

Thanks go out to the late Bill Pargaman, who has given so much to the probate bar of Texas and whose legislative work assisted the author in coming up with this update. Here are links to Bill’s 2023 legislative update and 2023 legislative supplement.

2.      Certified Mail No Longer Required

Certified mail has become increasingly unreliable, yet the Estates Code was full of requirements that documents be sent by certified mail.  SB 1373 (probate) and SB 1457 (guardianships) took steps to alleviate this problem by allowing most notices which previously required certified mail to be sent by a “qualified delivery method.”  Qualified delivery method is defined in new Section 22.0295 of the Estates Code to mean delivery by (1) hand delivery by courier, with courier’s proof of delivery receipt, (2) certified or registered mail, return receipt requested, with return receipt, or (3) a private delivery service designated as a designated delivery service by the U. S. Treasury for delivery of tax documentation, with proof of delivery receipt.

This will permit using courier services for local delivery and designated delivery services like United Parcel Service and Federal Express for out-of-town delivery of virtually all notices previously required to be sent by certified mail, such as notices to beneficiaries under Chapter 308 of the Estates Code.  As of this writing, the designated delivery services (called designated private delivery services, or PDSs in federal jargon) include specific services of DHL Express, FedEx, and UPS.  Not every delivery service by these three providers is authorized; only the specific services under each that have been approved may be used.  You can check the most recent list on the IRS website here: https://www.irs.gov/filing/private-delivery-services-pds.

The new methods are available for cases filed on or after September 1, 2023.  Notices for cases filed prior to September 1, 2023, will have to be done under the former statute.

3.      Felon May Serve as Personal Representative with Court Approval

Under prior law persons convicted of a felony were disqualified to serve as personal representatives of estates.  SB 1373 changes this so that in limited circumstances a convicted felon may serve as personal representative.  Section 304.003 is amended to provide that a convicted felon is not disqualified from serving as executor if (1) the person is named as executor in the will, (2) the person is not otherwise disqualified from serving and (3) the court approves.

This will make it easier to administer estates where the testator knows the named executor is a convicted felon and is not bothered by that.  It is limited to cases in which there is a will naming the person, so a convicted felon still will not be eligible to serve in an intestate administration or in testate estates where he or she is not named.

This change applies to applications for letters testamentary filed on or after September 1, 2023.

4.      Purpose Trusts

Traditionally noncharitable trusts had to have an identifiable beneficiary in order to be effective.  This changed in a limited way in 2005, when the legislature authorized pet trusts (Trust Code Section 112.037).  HB 2333 expands this exception by adding Section 112.121 – 123 to the Trust Code to permit trusts “created for a noncharitable purpose without a definite or definitely ascertainable beneficiary.”  A purpose trust may include seeking economic or noneconomic benefits.

A purpose trust is enforced by one or more trust enforcers named in the trust instrument.  Trust enforcers are fiduciaries required to enforce the purpose and terms of the trust.  They have the same rights as beneficiaries provided under the Trust Code and common law, but they are not beneficiaries of the trust.  Trust enforcers are entitled to reasonable compensation.  The trust instrument may provide for successor trust enforcers.  If a purpose trust ends up with no trust enforcer, a court properly exercising jurisdiction shall appoint one.

The Uniform Trust Code has a provision allowing purpose trusts, and under the UTC the duration of the trust was limited to 21 years.  The Texas version has no such limitation, so presumably one may create a purpose trust lasting until the expiration of the perpetuities period in 300 years.  Everything in Texas truly is bigger and better.

5.      Conveyance to Trust

Wannabe lawyers learn in the basic wills and estates course in law school that a trust is a relationship, not an entity.  Title is held in the name of the trustee, not the trust.

Despite this, inexperienced and experienced practitioners alike frequently make conveyance to the So-and-So Trust, not to the trustee of the trust.  A federal district court from the Southern District of Texas in 2021 held that a deed to a named trust that does not name the trustee was null and void.  This rang alarm bells in the real estate community.  The district court decision was reversed in Fugedi v. Initram, Incorporated, No. 21-40365 in the United States Court of Appeals for the Fifth Circuit, which held that such a deed is not void.  Still, the Legislature wanted to address this issue once and for all so that conveyances to a trust are permissible under Texas law.

SB 801 adds Section 114.087 to the Trust Code, providing that the trustee of a trust is considered for all purposes to be the named party to an instrument that names the trust as a party, unless the trust is a legal entity under state law.  This change is effective as of the date of the original instrument and applies to instruments executed before, on or after September 1, 2023.  A correction instrument identifying the trustee may be filed but is not required.

Section 114.087 also provides that a certification of trust under Trust Code Section 114.086 that is recorded in the real property records is presumed to correctly identify the trust and the trustee and may be relied upon by a good faith purchaser or lender for value.  That goes beyond the protection afforded third parties in Section 114.086(h), which provides that a person who “in good faith enters into a transaction relying on a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification are correct.”

6.      Psychologists and Advanced Practice Registered Nurses Performing Guardianship Exams

Under prior law, psychologists could prepare Physician’s Certificates of Medical Examination (PCMEs) in guardianships if the incapacity resulted from a developmental disability but not for other types of incapacity, such as dementia in an elderly person.  SB 1624 amended Section 1101.103 of the Estates Code to permit a psychologist to examine the proposed ward and prepare the PCME if the proposed ward’s incapacity results from a mental condition.  If the incapacity results from a physical condition, a licensed physician must do the exam and provide the certificate.

The changes to Section 1101.103 made by SB 1624 further provide that the physician or psychologist who provides the PCME must have experience examining individuals with the physical or mental condition resulting in the alleged incapacity or have an established patient-provider relationship with the proposed ward.

The changes made by SB 1624 become effective September 1, 2023.

Another bill amended Section 1101.103.  HB 3009 amends the same subsections in an inconsistent way to permit advanced practice registered nurses to perform the exam and provide the PCME, but the PCME must be signed by the nurse’s supervising physician.

HB 3009 also is effective September 1, 2023.  Hopefully the changes will be read in harmony so that the intent of both bills is carried out.

7.      Reimbursement Claims Between Marital Estates

Previously a claim for reimbursement between two marital estates (such as reimbursement of the community estate by a spouse’s separate estate) was limited to a list of specific types of transactions, such as payment by one marital estate of the unsecured liabilities of another marital estate. HB 1547 drops the list of specific transactions in favor of a description of when the “benefited estate” must reimburse the “conferring estate”:  (1) If one or both spouses used property of the conferring estate to pay a debt, liability, or expense that “in equity and good conscience” should have been paid from the benefited estate’s property. (2) If one or both spouses used property of the conferring estate to make improvements on the benefited estate’s real property and the improvements resulted in an enhancement of the value of the property. (3) If one or both spouses used time, toil, talent, or effort to enhance the value of property of a spouse’s separate estate beyond that which was reasonably necessary to manage and preserve the spouse’s separate property, and for which the community estate did not receive adequate compensation.

8.      Other Decedent’s Estates Changes

a.      Creditors’ Claims and Community Property

SB 1373 amends Estates Code Section 101.052 to define what community property is liable for debts in a decedent’s estate. 

(1) For either spouse (the decedent spouse or the surviving spouse), that spouse’s sole management community property and the joint management community property continues to be subject to the liabilities of that spouse upon the death of either spouse.

(2) The undivided one-half interest that the surviving spouse owned in the deceased spouse’s sole management community property is subject to the liabilities of the surviving spouse on the death of his or her spouse.

(3) The undivided one-half interest that the deceased spouse owned in the surviving spouse’s sole management community property passes to the deceased spouse’s heirs or devisees charged with the liabilities of the deceased spouse.

This means that the liability rules change when one spouse dies.  For example, while both spouses are alive Spouse 1’s sole management community property (both halves) is not liable for the non-tort debt of Spouse 2, but upon the death of Spouse 2, one half of Spouse 1’s sole management community property is liable to Spouse 2’s creditors.

SB 1373 is effective September 1, 2023.

b.      Brokerage Accounts Can Be Multiple Party Accounts

Previously Chapter 113 of the Estates Code, with its rules about ownership of multiple party accounts, applied only to accounts with cash deposits.  Many practitioners and some courts applied the same rules to accounts holding securities, but the statute didn’t support this.  Now SB 1373 has amended Estates Code Section 113.001 to provide that accounts holding securities, including stocks, bonds, and mutual funds are “accounts” for Chapter 113 purposes.

c.       Affidavit of Heirship as Proof in Heirship Proceeding

SB 1373 amends Estates Code Section 202.151 to permit proof at an heirship proceeding to be provided by an affidavit of heirship meeting the requirements of Estates Code Section 203.001 instead of by live testimony or deposition testimony.  It remains to be seen if individual courts will accept this alternative method of proof.

This change applies to heirship proceedings commenced on or after September 1, 2023.

d.      Declaration Under Penalties of Perjury Instead of Notarized Oaths

Oaths of personal representatives under the Estates Code had to be sworn before a notary or other officer authorized to take oaths.  During Covid we learned that, while many documents which previously had to be notarized could be signed with unsworn declarations, oaths of personal representatives were not permitted as unsworn declarations.  Now SB 1373 has amended Estates Code Sections 305.051 – 305.053 to permit “oaths” of personal representatives to be made by unnotarized declarations under penalty of perjury.

The new procedure is available for proceedings commenced on or after September 1, 2023.

9.      Other Trust Changes

a.      Rule Against Perpetuities Cleanup

In 2021, Section 112.036 of the Trust Code was amended to adopt a 300-year perpetuities period for trusts.  This legislation created confusion on a few points, so HB 2196 cleans it up in a few ways.  First, instead of referring to the effective date of the trust, the statute now refers to the effective date of the trust instrument, which is the date it becomes irrevocable.  Second, if the interest of one trust is distributed to another trust with a different effective date, the effective date of that interest in the second trust becomes the earlier of the effective date of the two trusts. 

b.      Homesteads Owned by Trusts

Under prior law, Tax Code Section 11.13(j) permitted the ad valorem homestead tax exemption if a trust beneficiary has a right to use the residence “rent free and without charge except for taxes and other costs and expenses,” while Property Code Section 41.0021 provided homestead creditor protection if a trust beneficiary has a right to use the residence “at no cost … other than payment of taxes and other costs and expenses.” These now have been harmonized by making Section 41.0021 read “at no cost or rent free and without charge.”

c.       Spendthrift Protection with General Testamentary Power of Appointment

HB 2196 amends Section 112.035 of the Trust Code to provide that a beneficiary holding a general testamentary power of appointment is not treated as a settlor of the trust (and thus is not exposing the trust assets to the beneficiary’s creditors) merely because the beneficiary holds the general power or exercises the power in favor of the takers in default of the appointive assets.

d.      Decanting into the “Same” Trust

HB 2196 amends Section 112.0715, regarding decanting, to provide that the trust receiving the decanting (the “second trust”) can have the same name and the same federal tax ID number as the decanting trust.

10.   Other Guardianship Changes

a.      Small Transaction Exception to Guardianships Increased to $250,000

Prior law permitted certain actions, such as the sale of a minor’s interest in property, to take place without the need for a guardianship of the estate if the value of the interest was $100,000 or less.  SB 1457 raised this limit to $250,000.  Thus: (1) a minor’s interest in property may be sold without a guardianship if its value is $250,000 or less (Estates Code Section 1351.001); (2) an out-of-state ward’s interest in property may be sold without the appointment of a guardian in Texas if the value of the property is $250,000 or less (Section 1351.052); (3) a minor’s interest in a residential homestead may be mortgaged if its value is $250,000 or less (Section 1352.052); (4) the guardian of the person of a minor ward whose interest in a residence homestead is worth $250,000 or less may mortgage the interest without the appointment of a guardian of the estate (Section 1352.102); and (5) a resident or nonresident creditor with a liquidated claim of $250,000 or less may collect the claim without the need for a guardianship (Sections 1355.001 and 1355.002).

b.      Attorney ad Litem/Attorney for Ward

SB 1624 made changes to provisions regarding representation of the proposed ward by an attorney ad litem or private attorney. 

Estates Code Section 1054.001 previously required the appointment of an attorney ad litem “to represent the proposed ward’s interests.” Now the attorney ad litem is “to represent the proposed ward's interests, including the proposed ward’s expressed wishes.”  This makes explicit what has been implicit in this statute.  A similar change was made to Estates Code Section 1054.007.

Estates Code Section 1054.006 permits the proposed ward (or a ward in a restoration proceeding) to retain an attorney to represent him or her instead of an attorney ad litem.  If the proposed ward retains his or her own attorney, the court is required to remove the attorney ad litem.  Any party to the proceeding may file a motion challenging the proposed ward’s capacity to retain an attorney, and the burden of proof is on the moving party to prove lack of such capacity.

c.       Parent Serving as Guardian of Estate May Designate Successor

Under prior law the surviving parent of an adult incapacitated person who was serving as guardian of the person could designate a successor guardian of the person.  SB 1457 amended Section 1104.103 of the Estates Code to permit the designation of a successor guardian of the estate as well and provides that different persons may be designated as successor guardian of the person and guardian of the estate.

d.      Guardian of Person May Manage Up to $20,000

New Section 1151.0525 permits the court to authorize a guardian of the person where there is no guardian of the estate to manage up to $20,000 per year for the ward’s benefit.  The court is required to set an appropriate bond, and the guardian of the person must report the expenditures on his or her annual report.

e.      Compensation of Guardian of the Person

Under prior law the court could authorize a guardian of the person not also serving as guardian of the estate to receive compensation not to exceed five percent of the ward’s gross income.  Now Section 1155.002 has been amended to permit the court to award the greater of $3,000 or five percent of the ward’s gross income.

11.   Other Changes

a.      Disclaimer by Agent Under Power of Attorney

SB 1650 amends Property Code Section 240.008 to permit an agent under a durable power of attorney which authorizes disclaimers to disclaim property without court approval, even if the disclaimer results in property being paid to the agent.

b.      Removal of Remains

SB 1300 amends Health and Safety Code Sections 711.002 and 711.004 to permit the person authorized to control the disposition of one’s remains to consent to the removal of that person’s remains.

a.      Remote Notarization of “Wet” Signatures

Chapter 406 of the Government Code was amended to permit remote (online) notarization of wet ink signatures.

b.      New Statutory Probate Courts

The legislature authorized new statutory probate courts in Bexar, Cameron, Montgomery, Harris and Travis Counties.

Pending Legislation: These Changes Have Gone to the Governor

This is part of a series of blog posts about legislation pending in Texas.

We are getting to the point of the biennial legislative session where some bills have already passed both houses and are sitting on the Governor’s desk.  It is possible that he will veto one or more of these bills, but that is unlikely.  Thus, the following changes are likely to become law later this year.

Qualified Delivery Method -- Several notices related to decedent’s estates and guardianships which now require registered or certified mail soon may be delivered by hand delivery by courier with the courier’s proof of delivery receipt or by private delivery service such as Federal Express with proof of delivery receipt.  (SB 1373 and SB 1457) This will make it easier to accomplish service, now that return of certified mail green cards sometimes take forever.

Unsworn Declarations Instead of Oaths – Under current law, personal representatives must give an oath before the clerk or a notary public in order to serve.  Under SB 1373, they will be able to serve upon giving an unsworn declaration.

Community Property Liability in Estates – The Estates Code is clarified to provided that (a) all of the joint management community property and all of the deceased spouse’s sole management community property is subject to the liabilities of the deceased spouse, (b) the half of the deceased spouse’s sole management community property that was owned by the surviving spouse is subject to the liabilities of the surviving spouse, and (c) the half of the surviving spouse’s sole management community property that was owned by the deceased spouse “passes to the deceased spouse’s heirs or devisees charged with the liabilities of the deceased spouse.” (SB 1373)

Felons Serving as Executor – A felon may serve as executor of a decedent’s estate if (1) the person is named in the decedent’s will, (2) the person is otherwise qualified to serve as executor, and (3) the court approves. (SB 1373)

Disclaimers Under Powers of Attorney – Currently a disclaimer by a fiduciary which results in property passing to the person making the disclaimer must be approved by a court.  Under SB 1650, court approval no longer will be required if the disclaimer is authorized under the Durable Power of Attorney Act.

Pending Legislation: Purpose Trusts

This is part of a series of blog posts about legislation pending in Texas.

A Texas trust must have an ascertainable beneficiary (except for charitable trusts and pet trusts, which are specifically authorized by Section 112.037 of the Trust Code).  HB 2333, authored by Rep. Steve Allison (San Antonio), would permit a trust to be created for a noncharitable purpose without an ascertainable beneficiary.  It also would permit a “commercial legacy trust” for a commercial purpose, including seeking economic and noneconomic benefits.

Purpose trusts are not an entirely new concept. Section 409 of the Uniform Trust Code permits trusts created for noncharitable purposes without an ascertainable beneficiary.  But the UTC version limits the duration of such trusts to 21 years.  Rep. Allison’s version would have no such restriction, so presumably it could last for up to 300 years.  The UTC doesn’t specifically authorize commercial legacy trusts, but it appears to be broad enough to permit such a trust.

Under the proposed law, a purpose trust would have to have one or more trust enforcers, who would be charged with enforcing the purpose and terms of the trust. In addition, a commercial legacy trust may have a business committee, which would act more or less like the board of directors of the trust.  The trustee would be obligated to follow the instructions of the business committee in most matters.

While it might be fun as a trust lawyer to draft a purpose trust, they are potentially problematic – especially if they may last for 300 years.  Section 112.031 of the Trust Code prohibits trusts created for an illegal purpose and provides that the terms of the trust may not require the trustee to commit a criminal or tortious act or an act that is contrary to public policy.  Purpose trusts under the new law would be subject to these restrictions.  Beyond that, however, there are no restrictions as to the purpose of the trust.

This bill has been on file for a while and hasn’t been set for a hearing (as of March 29, 2023), so it isn’t clear if it is going to pass.

2023 Tax-Free Amounts

The tax-free amount for estates and the gift tax exclusion amounts are indexed for inflation, so they adjust each January 1.  For persons dying in 2023, if their estates exceed $12,920,000, an estate tax return is required and estate tax may be due.  This is an $860,000 increase over the 2022 tax-free amount of $12,060,000.

The gift tax exclusion amount increases to $17,000 for gifts made in 2023, up from $16,000 for 2022.

Beginning for persons dying in 2026, the estate tax-free amount will be cut in half unless Congress changes the law before then.  Thus, after 2025, the tax-free amount will be closer to $6,500,000, although the exact amount is not now known due to the inflation adjustment.  This creates an estate planning problem – or opportunity – between now and the end of 2025.

For married persons, even if the estate of the first spouse to die is less than the tax-free amount, an estate tax return may be a good idea for portability purposes.  If a return is filed, the unused exemption amount can be assigned to the surviving spouse and added to the surviving spouse’s own tax-free amount.  Because of the scheduled halving of the tax-free amount in 2026, filing a return and claiming the unused exemption amount could be important to save future taxes.

2021 Legislative Update

There was very little legislation affecting probate, guardianship and trust law enacted in 2021. This is because only one of the bills promoted by the Real Estate, Probate and Trust Law Section of the State Bar of Texas (“REPTL”) passed – the guardianship bill. This was not due to any lack of effort on REPTL’s part. Rather, its legislation and a lot of other legislation got caught up in turmoil during the session about other issues.

By far the most significant legislation in this area which passed is a bill increasing the perpetuities period for trusts to 300 years.  This is discussed below.

1. The 300-Year Rule Against Perpetuities

1.1. The statutory change

HB 654 reorganizes Section 112.036 of the Trust Code. New subsection (c)(1) provides that an interest in a trust must vest “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 effective date is defined as the date the trust becomes irrevocable. Subsection (c)(2) provides that, if the effective date of the trust is before September 1, 2021, the old rule applies (interest must vest not later than 21 years after some life in being plus a period of gestation). However, subsection (d) provides that a pre-September 1, 2021, trust may be subject to the 300-year rule “if the trust instrument provides that an interest in the trust vests under the provisions of this section applicable to trusts on the date that the interest vests.”

New subsection (f) provides that “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 subsection was added to the bill late in the session and its purpose is unclear.

These provisions do not apply to charitable trusts, which may be perpetual.

1.2. Why is this significant?

For public policy reasons, noncharitable trusts in Texas have not been allowed to last forever. So the argument goes, tying up property for long periods of time could stymie commerce and growth because property would not be available for purchase by others. Therefore, a citizen of Texas could not create a trust which would last longer than the death of the last person in being at the trust’s creation plus 21 years plus a period of gestation (the “21 years after lives in being rule”). In most cases this meant that the maximum duration of a trust was 90 – 100 years. Rather than leaving the maximum trust period to vary based on lives in being, some states fixed the maximum term at 90 years or 100 years.  This provided clarity but did not materially extend the perpetuities period.

The adoption of the generation-skipping transfer tax (“GST”) and the ability to create GST-exempt trusts caused citizens and practitioners to seek ways to maximize the length of trusts.  If the property in a GST-exempt trust could avoid estate taxation in the second and third generations, why not continue it for the fourth, fifth, and sixth generations as well? Therefore, a demand arose for noncharitable trusts which did not have to end after 90 years or so.

A few states began to eliminate the rule against perpetuities entirely.  This was done largely to draw trust business to those states from the majority of states which had perpetuities limits. Some states did not eliminate the rule entirely but adopted extremely long perpetuities periods – 500 years, 700 years, etc.

Some trust offices at corporate trustees in Texas have long wished for Texas to join the states which have eliminated or greatly extended the rule against perpetuities. They saw trust business going to out-of-state institutions as Texans desiring extremely long-term trusts created those trusts with out-of-state corporate trustees so that they would be subject to other states’ laws.

There have been two big stumbling blocks for extending the perpetuities period in Texas.  First, some practitioners and charities opposed the extension on policy grounds. Second, the Texas constitution prohibits perpetuities, so eliminating the rule against perpetuities would have required a constitutional amendment.

In 2021, the proponents finally overcame opposition and were able to pass a bill. In an effort to meet the constitutional restriction, the drafters opted for setting the perpetuities limit to 300 years. The argument: “It isn’t perpetual – it has to end in 300 years – so it does not violate the constitution.”

This opens the door for a significant number of new GST-exempt trusts to permit ultra-long terms. The author assumes that a majority of GST-exempt trusts now will at least permit that trust (or trusts created out of the original trust as the generations pass) to last until the new perpetuities period, even if they contain provisions which give each generation a chance to end the trust.

1.3. Is it constitutional?

Article I, Section 26 of the Texas Constitution provides:

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.

The rule against perpetuities was pretty well defined and understood in 1876 when this constitutional provision was adopted, and it meant the 21 years after lives in being rule.  In 1984, the legislature included the 21 years after lives in being rule in Section 112.036 in the new Trust Code and it has been there ever since.

There is little doubt that the drafters of the 1876 constitution had the 21 years after lives in being rule in mind when this provision was added.  That’s what “perpetuities” meant back then. While the legislature may have some leeway in setting the maximum term – for example, setting it at 90 years instead of the uncertain period caused by the need to measure lives in being – it is not clear that this leeway permits more than tripling the perpetuities period.

For the best analysis of the constitutionality of the new statute, see Bill Pargaman’s 2021 legislative update or in the materials from the State Bar’s 2021 Advanced Estate Planning and Probate Course.  Bill’s conclusion on the constitutional issue (not on the merits of an extended perpetuities period):  a constitutional amendment probably is required to extend the perpetuities period to 300 years, so the new statute may be unconstitutional.

1.4. Should I draft trusts using the new 300-year perpetuities period?

What is the consequence of creating a trust in reliance on the 300-year rule and later learning that the Texas Supreme Court declares this statute unconstitutional?  The trust probably still will be valid, but it would terminate upon the running of the traditional perpetuities period. See Tex. Trust Code §112.036(e) and Tex. Property Code §5.043, which permit reformation of interests which otherwise violate the rule.

Therefore, if the client wants to continue the trust for multiple generations, there seems to be no reason not to utilize the new rule – the new trust will not fail; at worst it can be reformed. However, if perpetuities is a driving force for the client, not just a side benefit, then it makes sense to make the trust subject to another state’s laws where the Texas constitutional provision does not pose a threat.

1.5. Can I make the 300-year perpetuities period apply to my existing trust?

Subsection (d) provides that an interest in a pre-9/1/21 trust may be subject to the 300-year perpetuities period “if the instrument provides that an interest in the trust vests under the provisions of this section [Tex. Trust Code §112.036] applicable to trusts on the date that the interest vests.” A lot of attorneys, including the author, over the years have tried to draft provisions in trusts which would take advantage of a change in the rule against perpetuities, but the author doubts that many thought to refer to this Trust Code section and to provide that the interest vests under the law in effect “on the date that the interest vests.” Someone must have used this approach or the drafters would not have included this.  The author has used a provision which made it clear that the settlor wanted to take advantage of any later extension of the perpetuities period by any means possible, but that provision did not include the specific language from subsection (d). Perhaps the clear intention would be enough for a court to construe compliance with this subsection.

As a practical matter, though, it seems unlikely that many pre-9/1/21 trusts will be able to utilize the new 300-year period. Note, however, that the 300-year rule applies to trusts which become irrevocable on or after September 1, 2021, so existing trusts which are revocable can be amended to take advantage of the new rule.

What about a judicial modification of a trust to make the new perpetuities period apply?  This is likely to create GST problems if the effect of the change is to extend the date of vesting beyond its original date. Also, it may be difficult to get an attorney ad litem or guardian ad litem for unascertained beneficiaries to agree to a change which causes the trust property not to vest in the parties he or she represents. On the other hand, if the trust included a provision stating the settlor’s clear intent to take advantage of an extended perpetuities period, it would be easier to meet the statutory standards for modification in Texas Trust Code §112.054.

1.6.  What about trusts with real estate – does the 300-year rule apply?

Tex. Trust Code §112.036(f) provides that “a settlor 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.” Does this mean that trusts cannot utilize the new 300-year perpetuities period if the trust holds real estate?  Almost certainty not. While it is unclear why this provision was added to the statute, so long as the trust instrument does not require the trustee to hold a real estate interest for more than 100 years or prohibit the sale of a real estate interest for more than 100 years, the new 300-year perpetuities period should apply. In other words, as long as the trustee has discretion to sell or retain a real property interest and is not compelled to retain the interest, subsection (f) should not apply.

2. Disclaimers and Child Support Obligors

Section 240.151(g) of the Property Code provides that a disclaimer by a child support obligor meeting that section’s requirements is barred as to disclaimed property that could be applied to satisfy the disclaimant’s child support obligations.  This section remained unchanged and by itself is sufficient to prevent those child support obligors from avoiding their obligations by disclaiming.

That was not good enough for the proponents of SB 286, which adds subsection (e) to Section 240.009 of the Property Code to require that all disclaimers by individuals must contain a statement under penalty of perjury regarding whether the disclaimant is a child support obligor subject to Section 240.151(g).

As originally filed, this could have been a disaster for disclaimer practice. First, as originally filed each disclaimer would have to include a “sworn statement.” This would have required every disclaimer by an individual – regardless of whether or not the disclaimant was a child support obligor – to have the disclaimer notarized or to include an unsworn declaration. Fortunately, the proponents accepted a change that provides that the statement must be made under “penalties of perjury,” sidestepping the notarization issue.

Still, without a change the new subsection would have required every disclaimer to include a statement which would be wholly unnecessary for the vast majority of disclaimers, and it would have jeopardized the effectiveness of a disclaimer which failed to include the statement. Fortunately, the bill was amended to add this sentence to subsection (e): “An individual’s failure to include the statement does not invalidate a disclaimer if the disclaimer is not barred under Section 240.151(g).”

How does this change disclaimer practice? 

• Proper practice is to comply with the statute by making every disclaimer by an individual contain this statement: “Under penalty of perjury, I declare that I am not a child support obligor whose disclaimer is barred under Texas Property Code §240.151(g).”

• However, failure to include the statement does not render the disclaimer ineffective unless the disclaimant is in fact a child support obligor.

• Disclaimers still do not need to be notarized unless a real property interest is involved. See Texas Prop. Code §240.111.

3. Guardianship Law Changes

The REPTL guardianship bill (SB 626) was the only REPTL bill that passed. None of the changes it makes are earth-shattering, but there are numerous improvements and clean-ups.  Also, SB 615, which was supported by the statutory probate judges, passed and included numerous guardianship law changes.

Change to application requirements. SB 615 and SB 626 amended Estates Code §1101.001 to require that applications for guardianship (a) include the applicant’s former name, if any; and (b) provide a detailed description of the proposed ward’s liquid and illiquid assets, including real estate.

Unnotarized declaration permitted as oath of guardian. SB 626 makes several changes to Chapter 1105 of the Estates Code to permit a guardian to make an unnotarized declaration instead of taking a (notarized) oath in order to qualify as guardian.

All attorneys in guardianships must be certified. Estates Code §1054.201 previously required the attorney representing the applicant for a guardianship and all court-appointed attorneys in a guardianship proceeding to take a certification course.  SB 626 amends this section to require an attorney representing any party in a guardianship proceeding to be certified. The section also was amended to permit an uncertified attorney to commence representation of a person’s interest and file an appearance before completing the certification course, but the course must be completed within 14 days of filing the appearance and before filing any substantive motion in the proceeding.

Procedural changes for sale of real estate. SB 626 made several changes to Chapter 1158 regarding the sale of real property in a guardianship. Public sales of real estate must be made at a public auction subject to rules related to the time and place of the auction. There are changes regarding contracts for private sale and reporting sales to the court.

Temporary guardianship changes. SB 615 and SB 626 make several changes to the procedure for temporary guardians, including a more detailed requirement for final accounts.

Guardianship management trust changes. SB 626 includes a new notice provision and trust termination provisions for guardianship management trusts established under Chapter 1301 of the Estates Code.

Certain county courts at law may hear trust matters. SB 626 amended Estates Code §1021.001 to permit county courts at law in counties with no statutory probate court to hear a matter regarding the interpretation or administration of a trust of which the ward is a beneficiary. This parallels the jurisdiction of such courts in a decedent’s estate proceeding under Estates Code §31.002.

Dealing with an incapacitated guardian. HB 1296 and HB 3394 amended Section 1203.052 of the Estates Code to establish a procedure in the event there is probable cause to believe that a guardian is an incapacitated person.

4. Other Changes

We really mean it – driver’s license and social security numbers in all proceedings. SB 615 (supported by the statutory probate judges) amends Section 30.014 of the Civil Practices and Remedies Code to make it clear that each party to a civil action, including a probate or guardianship proceeding as well as any action in a statutory probate court, must include the last three digits of the party’s driver’s license number and the last three digits of the party’s social security number in the party’s initial pleading.

Serving out-of-state distributees in heirship proceeding. Estates Code §202.054 permits a court to require personal service on distributees named in an application for determination of heirship. For distributees outside Texas, the section was amended to permit any disinterested person to serve the citation.

Recording a non-English foreign will. Estates Code §503.001 provides an inexpensive way to pass title to Texas real estate under the terms of a will probated in another state or country.  An authenticated copy of the will and the order admitting it to probate in the foreign jurisdiction may be filed in the real property records without further proof or authentication. In 2021 Section 503.002 was amended to permit the recording of a non-English-language will in the real property records under Section 503.001, so long as a correct English language translation also is recorded.

Financial abuse of the elderly is a crime.  HB 1156 adds Section 32.55 to the Penal Code, making it an offense to knowingly engage in the financial abuse of an elderly individual. This includes financial exploitation by a fiduciary. The offense ranges from a Class A misdemeanor to a first degree felony, depending on the value of the property taken or appropriated. SB 109 amends Section 32.46 of the Penal Code, which makes it a crime to fraudulently secure the execution of a document affecting property or service or the pecuniary interest of any person.  The bill adds the concept of “effective consent” and provides that consent is not effective if it is given by a person who by reason of youth, mental disease or defect, or intoxication is unable to make reasonable property dispositions or given by a person who by reason of advanced age has diminished capacity to make informed and rational decisions about the reasonable disposition of property.

Expedited death certificates. HB 1011 adds Section 193.005 to the Health and Safety Code to permit an authorized person to request an expedited copy of a death certificate from certain counties if (a) expedited completion of the death certificate is needed for religious reasons and (b) the remains are to be interred in a foreign country. If this applies, the death certificate must be provided within 48 hours unless an inquest will be conducted.

The Karisch Law Firm is growing

We at the Karisch Law Firm, PLLC are pleased to announce that Julia Jonas has joined the firm.  Our newest attorney will be working with clients on estate planning, probate, and trust administration projects.  Julia grew up in Austin and is a graduate of the Austin Waldorf School. She was an English major at Carleton College in Northfield, Minnesota, before attending the University of Texas School of Law.  Julia is Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization.  She is licensed to practice law in Texas and Washington.  Before joining the Karisch Law Firm, Julia practiced law at Osborne, Helman, Knebel & Scott, LLP.  As Glenn Karisch’s daughter, it is hoped that she will be in a position to cull the worst of Glenn's dad jokes before they show up in future CLE presentations.

Learn more about Julia and the firm.

2019 Legislative changes

2019 Legislation

The 86th Texas Legislature was a fairly quiet session for probate, trust and guardianship legislation.  For a narrative summary of the legislation, see Glenn Karisch's 2019 Texas Legislative Update.  For a more comprehensive report, see Bill Pargaman's 2019 Texas Estate and Trust Legislative Update and the related Statutory Language Supplement.

2017 Legislation

The 85th Texas Legislature made significant changes affecting probate, trust and guardianship law.  Most bills become effective September 1, 2017, including a substantial rewriting of the durable power of attorney act.

Here is Glenn Karisch's 2017 Legislative Update, which describes the key changes and some of the issues they raise.

For a comprehensive report on 2017 changes, including the full text of most of the changes, see Bill Pargaman's legislative update.

Several disability planning forms changed, including the statutory durable power of attorney form and the medical power of attorney form.   

• Here are the statutory forms which changed in Word and pdf formats.

• Here are the current versions of all of the disability planning forms for attorney use.

• Here are the current versions of all of the disability planning forms for nonattorney use. These are important legal documents. Consumers are strongly encouraged to seek the advice of an attorney before using them.

 Here are some highlights of the 2017 changes:

Durable powers of attorney

For several sessions the Real Estate, Probate and Trust Law Section of the State Bar of Texas ("REPTL") has encouraged the legislature to make significant changes to the statutes governing durable powers of attorney for property.  Finally, HB 1974 has passed.  Many of these changes are derived from the Uniform Power of Attorney Act. While some of its provisions were watered down to address concerns expressed by other groups, the bill makes several changes, including: 

• Making acceptance of a power of attorney by a third party mandatory, although there are many limitations and exceptions to this. (Estates Code Sections 751.201 -- 751.213)

• Changing the statutory durable power of attorney form, meaning that attorneys will need to update their forms for use beginning September 1, 2017. (Estates Code Section 752.051)

• Defining when and how an agent accepts appointment. This determines when he or she owes fiduciary duties as agent. (Estates Code Section 751.022)

• Permitting the principal to delegate to the agent or another person the authority to name successor agents. (Estates Code Section 751.023)

• Providing that the agent is entitled to compensation and reimbursement of expenses unless the power provides otherwise. (Estates Code Section 751.024)

• Allowing opt-in (non-default) powers to change, amend or revoke a trust, to make a gift, to create or change survivorship rights, to create or change beneficiary designations and to delegate authority. (Estates Code Section 751.031)

• Imposing a duty to preserve the principal's estate plan. (Estates Code Section 751.122)

• Stating who has standing to bring an action regarding a power of attorney. Persons with standing include the principal, the agent, a guardian of the principal, a person named as a beneficiary to receive property on the principal's death, a governmental agency with authority to protect the principal, or another person who demonstrates to the court sufficient interest in the principal's welfare or estate.

Medical Powers of Attorney

HB 995 is REPTL's medical power of attorney bill.  It revokes the authority of a spouse under a medical power of attorney if the marriage is dissolved and makes the disclosure statement a part of the medical power of attorney form itself.  The statutory form must be used -- REPTL's attempt to make the form permissive rather than mandatory was rejected due to opposition from the medical industry. While the new statutory durable power of attorney form is effective September 1, 2017, the new medical power of attorney form must be used beginning January 1, 2018.

Decedents' Estates

HB 2271 is REPTL's decedents' estates bill.  As usual, it tinkers with the Estates Code provisions dealing with the estate of a deceased person.  A few of the changes are: 

• Setting the deadline for modifying or reforming a will to four years following admission to probate. (Estates Code Section 255.451)

• Increasing the limit for small estate affidavit proceedings from $50,000 to $75,000. (Estates Code Section 205.001)

• Giving independent executors the default power to make non-pro-rata distributions. (Estates Code Section 405.0015)

Trust Code

SB 617 is REPTL's bill making changes to the Trust Code.  Among the changes are: 

• Broadening the authority of trustees to decant (transfer principal from one trust to another) by narrowing the definition of "limited discretion" trusts. Under the new law, if a trust is not limited by an ascertainable stanard (such as health, education, maintenance or support) or does not contain a mandatory prinicpal distribution provision, it will be considered a "full discretion" trust. (Trust Code Section 112.071)

• Permitting reformation of trust in certain cases, including scrivener's error. (Trust Code Section 112.054)

Digital Assets

 SB 1193 enacts the Texas Revised Uniform Fiduciary Access to Digital Assets Act.  This act attempts to balance the interests of fiduciaries with the interests of online providers.  It gives Internet users at least some ability to give their agents or exdcutors authority to deal with digital assets.

Guardianships

As usual, there were a number of bills making changes affecting guardianships, including REPTL's SB 39 (making a number of changes) and SB 511 (permitting a declaration of guardian to be executed before a notary in lieu of two witnesses if the declaration does not disqualify anyone from serving as guardian). 

Legislative changes take effect September 1, 2017

Most of the changes made to the Estates Code, Trust Code and related statutes by the 85th Texas Legislature became effective September 1, 2017. See the 2017 Legislation page to learn about these changes, including links to legislative updates and to downloadable forms.

New disability planning forms for use beginning September 1, 2017, except for one...

The Texas Legislature changed four disability planning forms and added a related form.  With one exception, these new forms should be used beginning September 1, 2017.

There were major changes to the durable power of attorney act.  This led to changes in the statutory durable power of attorney form and to the adoption of a new certification form for agents.

There were minor changes to the declaration of guardian form for adults and to the declaration for mental health treatment.  These changes make it unnecessary to use two witnesses if the declaration is acknowledged before a notary public, except that the declaration of guardian still requires two witnesses if it disqualifies anyone from serving as guardian.

All of the above forms are for use beginning September 1.  The exception is the medical power of attorney form.  It was revised to incorporate the disclosure statement in the form itself, eliminating the need for a separate disclosure statement.  The new form is effective January 1, 2018.  Its use is mandatory, so take care to use the correct form.

For more information, see Glenn Karisch's 2017 Legislative Update.

• Here are the statutory forms which changed in Word and pdf formats.

• Here are the current versions of all of the disability planning forms for attorney use.

• Here are the current versions of all of the disability planning forms for nonattorney use.  These are important legal documents.  Consumers are strongly encouraged to seek the advice of an attorney before using them. 

Trust modification paper now addresses 2017 legislative changes

Glenn Karisch has updated his "Fixing or Killing Off Broken Trusts" paper to address changes to the Texas Trust Code made in 2017 by the Texas legislature.  These changes permit reformation of trusts and liberalized decanting in Texas and are effective September 1, 2017.

The updated paper is available here.