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Texas Paves the Way for Purpose Trusts
A new law in Texas could lay the groundwork for more employee ownership and (practically) perpetual purpose trusts
The short of it: Last week a new law went into effect in Texas allowing for “non-charitable purpose trusts without an ascertainable beneficiary,” the kind of legal vehicle underneath the sort of purpose trusts we write about here at EO+WD. We’re still working on figuring it out where it came from.
The article is about HB 2333, authored and sponsored by Steve Allison (R-San Antonio) and Pete Flores (R-Fredericksburg). It was referred to the Judiciary & Civil Jurisprudence Committee, where Jeff Leach and Julie Johnson are the ranking Republican and Democratic Representatives. Starting at 51:14 in the broadcast of that hearing, Rep. Steve Allison gives initial pitch. Here are some quick notes, much of which are direct quotes:
Texas has limited this type of trust to charitable trusts and pet trusts, because there was no one to hold the trust accountable. This bill provides for those.
We see a declining number of closely held companies in Texas; this tries to remedy that.
If family members are not interested in taking over a family business, that business will likely be dissolved. This can allow a company to continue after the retirement or death of the original owner.
Lois Ann Stanton (LinkedIn), an estate planning and probate lawyer in Austin with Osborne, Helman, Scott, Knisely & Stanton, testified in favor of the bill (see 55m10s). Some hastily typed out quotations:
“Texas is one of only a dozen states that has not adopted trust provisions allowing non-charitable trusts to exist without ascertainable beneficiaries. These trusts are often called purpose trusts. While 21 of the statues provide that a purpose trust can only exist for 21 years, 19 states have recognized that that arbitrary term of years can greatly limit the benefits of using a purpose trust.”
“Florida, South Dakota, Delaware, Wyoming and Nevada have authorized the use of purpose trusts either in perpetuity or for hundreds of years.”
“Many successful entrepreneurs do not have family members who desire or have the ability to carry on the business. These entrepreneurs want to find a way for the business to continue for the benefit of their employees, their customers, their suppliers, and the community in general. If the business is sold to a competitor or a large national company, jobs will likely be consolidated and the business materially changed. The purpose trust provides the vehicle to continue the ownership of the business as an independent company.”
Bill Pargaman from the from the (seemingly ungoogleable) Texas Real Estate and Probate Institute, and who recently passed away, was the go-to person on estate and trust law, according to one person I interviewed. He testified against a part of the bill that was later removed, though which may have been modeled after Oregon’s stewardship trusts law. From Pargaman’s update on the bill:
‘HB 2333 (Allison | Flores) authorizes the creation of a noncharitable trust without an ascertainable beneficiary. We believe that this is what’s commonly known as a “purpose trust.” This is a trust designed to accomplish a particular purpose, such as the preservation of collections, the maintenance of a family compound, or the continuation of a business for its employees. Google it. Since a purpose trust does not have [a] beneficiary to enforce its terms, one or more trust enforcers must be appointed to ensure that the trust's purposes are met. The trust enforcer has the same rights as a beneficiary but serves as a fiduciary. Assets in excess of amounts needed to fulfill the trust's purpose are distributable as provided in the trust instrument or to the settlor or the settlor's successors if the trust instrument does not otherwise provide for a taker in default.
An earlier version of this post said that this law would enable purpose trusts to operate in Texas in perpetuity. We’ve learned that’s not quite right; in Texas, according to a local lawyer, the limit is 300 years. Check back in 2333 for an update.