AUTHOR'S / SPONSOR'S STATEMENT OF INTENT

 

As part of its ongoing review of Texas probate, guardianship, and trust law, the Real Estate, Probate, and Trust Law Section of the State Bar of Texas has proposed several updates to the law regarding trusts. The changes include an updated definition of property, appointment of trusts, and title coverage. Each of these updates are intended to clean up the current law regarding trusts.

 

H.B. 2913 amends current law relating to trusts.

 

RULEMAKING AUTHORITY

 

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.

 

SECTION BY SECTION ANALYSIS

 

SECTION 1.  Amends Section 111.004(12), Property Code, to redefine "property" to include property held in any digital or electronic medium.

 

SECTION 2.  Amends Section 112.035, Property Code, by amending Subsection (d) and adding Subsections (g) and (h), as follows:

 

(d) Provides that a settlor is not considered a beneficiary of a trust solely because a trustee who is not the settlor is authorized under the trust instrument to pay or reimburse the settlor for, or pay directly to the taxing authorities, any tax on trust income or principal that is payable by the settlor under the law imposing the tax, or the settlor's interest in the trust was created by the exercise of a power of appointment by a third party.

 

(g) Provides that, for the purposes of this section, property contributed to the following trusts is not considered to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts if prohibited from being treated as a settlor:

 

(1) an irrevocable inter vivos marital trust if the settlor is a beneficiary of the trust after the death of the settlor's spouse and the trust is treated as qualified terminable interest property under Section 2523(f), Internal Revenue Code of 1986 or a general power of appointment trust under Section 2523(e), Internal Revenue Code of 1986;

 

(2) an irrevocable inter vivos trust for the settlor's spouse if the settlor is a beneficiary of the trust after the death of the settlor's spouse; or

 

(3) an irrevocable trust for the benefit of a person if the settlor is the person's spouse, regardless of whether or when the person was the settlor of an irrevocable trust for the benefit of that spouse or to the extent that the property of the trust was subject to a general power of appointment in another person.

 

(h) Provides that, for the purposes of Subsection (g), a person is a beneficiary whether named a beneficiary under the initial trust instrument or through the exercise of a limited or general power of appointment by that person's spouse or another person.

 

SECTION 3.  Amends Chapter 112, Property Code, by adding Subchapter D, as follows:

 

SUBCHAPTER D.  DISTRIBUTION OF TRUST PRINCIPAL IN FURTHER TRUST

 

Sec. 112.071.  DEFINITIONS.  Defines "authorized trustee," "charity," "current beneficiary," "first trust," "full discretion," "limited discretion," "presumptive remainder beneficiary," "principal," "second trust," and "successor beneficiary" in this section.

 

Sec. 112.072.  DISTRIBUTION TO SECOND TRUST: TRUSTEE WITH FULL DISCRETION.  (a) Authorizes an authorized trustee who has the full discretion to distribute the principal of a trust to distribute all or part of the principal of that trust in favor of a trustee of a second trust for the benefit of one or more current beneficiaries of the first trust who are eligible to receive income or principal from the trust and for the benefit of one or more successor or presumptive remainder beneficiaries of the first trust who are eligible to receive income or principal from the trust.

 

(b) Authorizes the authorized trustee to, in connection with the exercise of a power of distribution under this section, grant a power of appointment, including a currently exercisable power of appointment, in the second trust to one or more of the current beneficiaries of the first trust who, at the time the power of appointment is granted, is eligible to receive the principal outright under the terms of the first trust.

 

(c) Authorizes the class of permissible appointees in whose favor the beneficiary is authorized to appoint under that power, if the authorized trustee grants a power of appointment to a beneficiary under Subsection (b), to be broader or different than the current, successor, and presumptive remainder beneficiaries of the first trust.

 

(d) Authorizes the beneficiaries of the second trust, if the beneficiaries of the first trust are described as a class of persons, to include one or more persons who become members of that class after the distribution to the second trust.

 

(e) Requires the authorized trustee to exercise a power to distribute under this section in good faith, in accordance with the terms and purposes of the trust, and in the interests of the beneficiaries.

 

Sec. 112.073.  DISTRIBUTION TO SECOND TRUST: TRUSTEE WITH LIMITED DISCRETION.  (a) Authorizes an authorized trustee who has limited discretion to distribute the principal of a trust to distribute all or part of the principal of that trust in favor of a trustee of a second trust as provided by this section.

 

(b) Requires the current beneficiaries of the second trust to be the same as the current beneficiaries of the first trust, and the successor and presumptive remainder beneficiaries of the second trust are required to be the same as the successor and presumptive remainder beneficiaries of the first trust.

 

(c) Requires that the second trust include the same language authorizing the trustee to distribute the income or principal of the trust that was included in the first trust.

 

(d) Requires the beneficiaries of the second trust, if the beneficiaries of the first trust are described as a class of persons, to include all persons who become members of that class after the distribution to the second trust.

 

(e) Requires that the second trust, if the first trust grants a power of appointment to a beneficiary of the trust, grant the power of appointment to the beneficiary in the second trust, and the class of permissible appointees under that power is required to be the same as the class of permissible appointees under the power granted by the first trust.

 

(f) Requires the authorized trustee to exercise a power of distribution under this section in good faith, in accordance with the terms and purposes of the trust, and in the interests of the beneficiaries.

 

Sec. 112.074.  NOTICE REQUIRED.  (a) Authorizes an authorized trustee to exercise a power of distribution under Section 112.072 or 112.073 without the consent of the settlor or beneficiaries of the first trust and without court approval if the trustee provides to all of the current beneficiaries and presumptive remainder beneficiaries written notice of the trustee's decision to exercise the power.

 

(b) Provides that, for the purpose of determining who is a current beneficiary or presumptive remainder beneficiary entitled to the notice, a beneficiary is determined as of the date the notice is sent.  Provides that a beneficiary includes a person entitled to receive property under the terms of the first trust.

 

(c) Requires the authorized trustee, in addition to the notice required under Subsection (a), to give written notice of the trustee's decision to the attorney general if:

 

(1) a charity is entitled to notice;

 

(2) a charity entitled to notice is no longer in existence;

 

(3) the trustee has the authority to distribute trust assets to one or more charities that are not named in the trust instrument; or

 

(4) the trustee has the authority to make distributions for a charitable purpose described in the trust instrument, but no charity is named as a beneficiary for that purpose.

 

(d) Requires that the notice required to be given by this section, if the beneficiary has a court-appointed guardian or conservator, be given to that guardian or conservator.  Requires that the notice required to be given by this section, if the beneficiary is a minor for whom no guardian or conservator has been appointed, be given to a parent of the minor.

 

(e) Provides that the authorized trustee is not required to provide a copy of the notice to a beneficiary who is known to the trustee and cannot be located by the trustee after reasonable diligence; is not known to the trustee; waives the requirement of the notice under this section; or is a descendant of a beneficiary to whom the trustee has given notice if the beneficiary and the beneficiary's ancestor have similar interests in the trust and no apparent conflict of interest exists between them.

 

(f) Requires that the notice required under Subsection (a):

 

(1) include a statement that the authorized trustee intends to exercise the power of distribution; the beneficiary has the right to object to the exercise of the power; and the beneficiary may petition a court to approve, modify, or deny the exercise of the trustee's power to make a distribution under this subchapter;

 

(2) describe the manner in which the trustee intends to exercise the power;

 

(3) specify the date the trustee proposes to distribute the first trust to the second trust;

 

(4) include the name and mailing address of the trustee;

 

(5) include copies of the agreements of the first trust and the proposed second trust;

 

(6) be given not later than the 30th day before the proposed date of distribution to the second trust; and

 

(7) be sent by registered or certified mail, return receipt requested, or delivered in person, unless the notice is waived in writing by the person to whom notice is required to be given.

 

Sec. 112.075.  WRITTEN INSTRUMENT REQUIRED.  Requires that a distribution under Section 112.072 or 112.073 be made by a written instrument that is signed and acknowledged by the authorized trustee and filed with the records of the first trust and the second trust.

 

Sec. 112.076.  REFERENCE TO TRUST TERMS.  Provides that a reference to the governing instrument or terms of the governing instrument of a trust includes the terms of a second trust to which that trust's principal was distributed under this subchapter.

 

Sec. 112.077.  SETTLOR OF SECOND TRUST.  (a) Provides that except as provided by Subsection (b), the settlor of a first trust is considered to be the settlor of a second trust established under this subchapter.

 

(b) Provides that if a settlor of a first trust is not also the settlor of a second trust into which principal of that first trust is distributed, the settlor of the first trust is considered the settlor of the portion of the second trust distributed to the second trust from that first trust under this subchapter.

 

Sec. 112.078.  COURT-ORDERED DISTRIBUTION.  (a) Authorizes an authorized trustee to petition a court to order a distribution under this subchapter.

 

(b) Authorizes the authorized trustee or the beneficiary, if the trustee receives a written objection to a distribution under this subchapter from a beneficiary before the proposed effective date of the distribution specified in the notice provided to the beneficiary under Section 112.074, to petition a court to approve, modify, or deny the exercise of the trustee's power to make a distribution under this subchapter.

 

(c) Prohibits the trustee, if the authorized trustee receives a written objection to the distribution from the attorney general not later than the 30th day after the date the notice required by Section 112.074 was received by the attorney general, from making a distribution under Section 112.072 or 112.073 without petitioning a court to approve or modify the exercise of the trustee's power to make a distribution under this subchapter.

 

(d) Authorizes the authorized trustee, in a judicial proceeding under this section, to present the trustee's reasons for supporting or opposing a proposed distribution, including whether the trustee believes the distribution would enable the trustee to better carry out the purposes of the trust.

 

(e) Provides that the authorized trustee has the burden of proving that the proposed distribution furthers the purposes of the trust, is in accordance with the terms of the trust, and is in the interests of the beneficiaries.

 

Sec. 112.079.  DIVIDED DISCRETION.  Authorizes the authorized trustee having full discretion, if an authorized trustee has full discretion to distribute the principal of a trust and another trustee has limited discretion to distribute principal under the trust instrument, to exercise the power to distribute the trust's principal under Section 112.072.

 

Sec. 112.080.  LATER DISCOVERED ASSETS.  Provides that to the extent the authorized trustee does not provide otherwise the distribution of all of the principal of a first trust to a second trust includes subsequently discovered assets otherwise belonging to the first trust and principal paid to or acquired by the first trust after the distribution of the first trust's principal to the second trust and the distribution of part of the principal of a first trust to a second trust does not include subsequently discovered assets belonging to the first trust or principal paid to or acquired by the first trust after the distribution of principal from the first trust to the second trust, and those assets or that principal remain the assets or principal of the first trust.

 

Sec. 112.081.  OTHER AUTHORITY TO DISTRIBUTE IN FURTHER TRUST NOT LIMITED.  Prohibits this subchapter from being construed to limit the power of an authorized trustee to distribute property in further trust under the terms of the governing instrument of a trust, other law, or a court order.

 

Sec. 112.082.  NEED FOR DISTRIBUTION NOT REQUIRED.  Authorizes an authorized trustee to exercise the power to distribute principal to a second trust under Section 112.072 or 112.073 regardless of whether there is a current need to distribute principal under the terms of the first trust.

 

Sec. 112.083.  DUTIES NOT CREATED.  (a) Provides that this subchapter does not create or imply a duty for an authorized trustee to exercise a power to distribute principal, and impropriety is prohibited from being inferred as a result of the trustee not exercising a power conferred by Section 112.072 or 112.073.

 

(b) Provides that an authorized trustee does not have a duty to inform beneficiaries about the availability of the authority provided by this subchapter or a duty to review the trust to determine whether any action should be taken under this subchapter.

 

Sec. 112.084.  CERTAIN DISTRIBUTIONS PROHIBITED.  (a) Prohibits an authorized trustee, except as provided by Subsection (b), from exercising a power to distribute principal of a trust otherwise provided by Section 112.072 or 112.073 if the distribution is expressly prohibited by the terms of the governing instrument of the trust.

 

(b) Provides that a general prohibition of the amendment or revocation of a trust or a provision that constitutes a spendthrift clause does not preclude the exercise of a power to distribute principal of a trust under Section 112.072 or 112.073.

 

Sec. 112.085.  EXCEPTIONS TO POWER OF DISTRIBUTION.  Prohibits an authorized trustee from exercising a power to distribute principal of a trust under Section 112.072 or 112.073 to:

 

(1) reduce, limit, or modify a beneficiary's current, vested right to receive a mandatory distribution of income or principal, receive a mandatory annuity or unitrust interest, withdraw a percentage of the value of the trust, or withdraw a specified dollar amount from the trust;

 

(2) materially impair the rights of any beneficiary of the trust;

 

(3) materially limit a trustee's fiduciary duty under the trust or as described by Section 111.0035 (Default and Mandatory Rules; Conflict Between Terms and Statute);

 

(4) decrease or indemnify against a trustee's liability or exonerate a trustee from liability for failure to exercise reasonable care, diligence, and prudence;

 

(5) eliminate a provision granting another person the right to remove or replace the authorized trustee exercising the distribution power under Section 112.072 or 112.073; or

 

(6) reduce, limit, or modify in the second trust a perpetuities provision included in the first trust, unless expressly permitted by the terms of the first trust.

 

Sec. 112.086.  TAX-RELATED LIMITATIONS.  (a) Prohibits the authorized trustee from distributing the principal of a trust under Section 112.072 or 112.073 in a manner that would prevent a contribution to that trust from qualifying for or that would reduce the exclusion, deduction, or other federal tax benefit that was originally claimed for that contribution, including the annual exclusion under Section 2503(b), Internal Revenue Code of 1986; a marital deduction under Section 2056(a) or 2523(a), Internal Revenue Code of 1986; the charitable deduction under Section 170(a), 642(c), 2055(a), or 2522(a), Internal Revenue Code of 1986; direct skip treatment under Section 2642(c), Internal Revenue Code of 1986; or any other tax benefit for income, gift, estate, or generation-skipping transfer tax purposes under the Internal Revenue Code of 1986.

 

(b) Authorizes an authorized trustee, notwithstanding Subsection (a), to distribute the principal of a first trust to a second trust regardless of whether the settlor is treated as the owner of either or both trusts under Sections 671-679, Internal Revenue Code of 1986.

 

(c) Prohibits an authorized trustee, if S corporation stock is held in trust, from distributing all or part of that stock under Section 112.072 or 112.073 to a second trust that is not a permitted shareholder under Section 1361(c)(2), Internal Revenue Code of 1986.

 

(d) Prohibits an authorized trustee, if an interest in property that is subject to the minimum distribution rules of Section 401(a)(9), Internal Revenue Code of 1986, is held in trust, from distributing the trust's interest in the property to a second trust under Section 112.072 or 112.073 if the distribution would shorten the minimum distribution period applicable to the property.

 

Sec. 112.087.  COMPENSATION OF TRUSTEE.  (a) Prohibits the trustee, except as provided by Subsection (b) and unless a court, on application of the authorized trustee, directs otherwise, from exercising a power under Section 112.072 or 112.073 solely to change trust provisions regarding the determination of the compensation of any trustee.

 

(b) Authorizes an authorized trustee, in connection with the exercise of a power under Section 112.072 or 112.073 for another valid and reasonable purpose, to bring the trustee's compensation into conformance with reasonable limits authorized by state law.

 

(c) Authorizes the compensation payable to an authorized trustee of the first trust to continue to be paid to the trustee of the second trust during the term of the second trust and is authorized to be determined in the same manner as the compensation would have been determined in the first trust.

 

(d) Prohibits an authorized trustee from receiving a commission or other compensation for the distribution of a particular asset from a first trust to a second trust under Section 112.072 or 112.073.

 

SECTION 4.  Amends Section 113.029, Property Code, by amending Subsection (b) and adding Subsection (e), as follows:

 

(b) Provides that, subject to Subsection (d) (relating to Subsection (b) not applying to certain powers and certain trusts), and unless the terms of the trust expressly indicate that a requirement provided by this subsection does not apply:

 

(1) a person, other than a settlor, who is a beneficiary and trustee, trustee affiliate, or discretionary power holder of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's, the trustee affiliate's, or discretionary power holder's personal benefit is authorized to exercise the power only in accordance with an ascertainable standard relating to the trustee's, the trustee affiliate's, or the discretionary power holder's individual health, education, support, or maintenance within the meaning of Section 2041(b)(1)(A) or 2514(c)(1), Internal Revenue Code of 1986; and

 

(2) Makes no change to this subdivision.

 

(e) Defines "discretionary power holder" in this section.

 

SECTION 5.  Amends Section 115.002, Property Code, by adding Subsections (b-1) and (b-2) and amending Subsections (c), (c-1), and (f), as follows:

 

(b-1) Requires that an action, if there are multiple noncorporate trustees and the trustees maintain a principal office in this state, be brought in the county in which:

 

(1) the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed; or

 

(2) the trustees maintain the principal office.

 

(b-2) Requires that an action, if there are multiple noncorporate trustees and the trustees do not maintain a principal office in this state, be brought in the county in which:

 

(1) the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed; or

 

(2) any trustee resides or has resided at any time during the four-year period preceding the date the action is filed.

 

(c) Requires that an action, if there are one or more corporate trustees, rather than multiple trustees or a corporate trustee, be brought in the county in which:

 

(1) the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed, rather than the situs of administration of the trust is maintained or has been maintained at any time during the four-year period preceding the date the action is filed, provided that an action against a corporate trustee as defendant may be brought in the county in which the corporate trustee maintains its principal office in this state; or

 

(2) any corporate trustee maintains its principal office in this state.

 

(c-1) Authorizes an action involving the interpretation and administration of an inter vivos trust created by the settlor or a testamentary trust created by the settlor's will, notwithstanding Subsections (b) (relating to requiring that an action, if there is a single, noncorporate trustee, be brought in a certain county that fulfills the criteria), (b-1), (b-2), and (c), if the settlor is deceased and an administration of the settlor's estate is pending in this state, to be brought:

 

(1) in a county in which venue is proper under Subsection (b), (b-1), (b-2), or (c); or

 

(2) in the county in which the administration of the settlor's estate is pending.

 

(f) Provides that, for purposes of this section:

 

(1) Makes no change to this subdivision.

 

(2) Redefines "principal office."

 

(2-a) Provides that the mere presence of an agent or representative of a trustee, rather than of the corporate trustee, does not establish a principal office as defined by Subdivision (2).  Authorizes the principal office of a corporate trustee or the principal office maintained by multiple noncorporate trustees to also be but is not necessarily the same as the situs of administration of the trust.

 

(3) Authorizes the situs of administration to also be but not necessarily be the same as the principal office of a corporate trustee or the principal office maintained by multiple noncorporate trustees.

 

SECTION 6.  Amends Section 11.13(j), Tax Code, to redefine "residence homestead," "trustor," and "qualifying trust" in this section.

 

SECTION 7.  Amends Section 152.025(a), Tax Code, as follows:

 

(a) Imposes a tax on the recipient of a gift of a motor vehicle.  Provides that this section applies only if a person receiving the motor vehicle receives the vehicle from:

 

(1) a trust subject to the Texas Trust Code (Subtitle B (Texas Trust Code: Creation, Operation, and Termination of Trusts), Title 9 (Trusts), Property Code) that was revocable by a decedent or that was jointly revocable by a decedent and the decedent's spouse or a trust subject to the Texas Trust Code that is revocable by the person receiving the motor vehicle or that is jointly revocable by the recipient and the recipient's spouse;

 

(2) is a trust subject to the Texas Trust Code that is revocable by the transferor of the motor vehicle or that is jointly revocable by the transferor and the transferor's spouse; or

 

(3) Redesignates existing Subdivision (2) as Subdivision (3) and makes no further change to this subdivision.

 

SECTION 8.  Provides that the legislature intends Subchapter D, Chapter 112 (Creation, Validity, Modification, and Termination of Trusts), Property Code, as added by this Act, to be a codification of the common law of this state in effect before the effective date of this Act.

 

SECTION 9.  (a) Provides that, except as otherwise expressly provided by a trust, a will creating a trust, or this section, the changes in law made by this Act apply to a trust existing or created on or after September 1, 2013.

 

(b) Provides that, for a trust existing on September 1, 2013, that was created before that date, the changes in law made by this Act apply only to an act or omission relating to the trust that occurs on or after September 1, 2013.

 

(c) Provides that Section 115.002 (Venue), Property Code, as amended by this Act, applies only to a court action commenced on or after the effective date of this Act.  Provides that an action commenced before the effective date of this Act is governed by the law in effect immediately before that date, and the former law is continued in effect for that purpose.

 

SECTION 10.  Effective date: September 1, 2013