There’s a new type of trust on the scene in Texas: the Noncharitable Trust Without Ascertainable Beneficiary. That’s a mouthful that most people will not know what to do with. But this new type of trust could be really interesting to some folks.
Trust Law Essentials
First, understand why this kind of trust is so new. Trust law historically has required a few essential items in order to have a valid trust:
- Trust property
- A trustee to administer and disburse the trust property
- A beneficiary to whom the trustee makes disbursements
After all, if you don’t have trust property, there is nothing for the trustee to do. If you don’t have a trustee, there is no difference between leaving property in trust and leaving it outright to the beneficiary. And if there is no beneficiary, then there is no purpose to administer the trust property, and nobody to determine whether the trust property is being administered as was intended.
But if you’re paying attention, our new trust in town is “without ascertainable beneficiary.” So what gives?
What Makes Noncharitable Trust Without Ascertainable Beneficiary Different?
The legislature has joined with several other states in the nation to recognize a trust which is established, not for the benefit of a particular person, but for a particular purpose. For this reason, these trusts are often called “purpose trusts.” By replacing the beneficiary with a new trust role called the “enforcer,” we have someone who can oversee the trustee and legally ensure adherence with the trust terms, but who isn’t entitled to any of the trust property. Voila! A trust to accomplish a particular end, in the hands of a reliable person, with checks and balances, but without the pesky fiduciary obligations to a beneficiary.
Similar Types of Trusts
Actually, we have had a form of this type of trust in Texas for several years. Since 2006, Texans have been able to establish pet trusts for the continued care of their beloved pets after the death of the owner. A dog or cat, then, can receive the benefit of trust property, but they are not legally able to own anything nor enforce trust terms in a court of law. For this reason, a “caregiver” was usually introduced as a third party to receive trust funds from the trustee on behalf of the animal, and enforce the terms of the trust against the trustee, if necessary.
Additionally, charitable trusts could be set up without a particular beneficiary because the attorney general had the authority to enforce the trust terms on behalf of charities. But until now, these were the only types of non-human-beneficiary trusts available.
Applications of the Noncharitable Trust Without Ascertainable Beneficiary
The new trusts have some interesting possible applications.
Maintenance
Maintenance of a private grave site or maintenance of valuable antiques or collections would both lend themselves to a purpose trust. Trustmakers could fund social work projects that don’t legally qualify as a “charitable” cause. It could be anything, so long as the purpose is “reasonably attainable,” not wasteful or capricious, nor against public policy.
Vacation Home Ownership
Continued ownership of a vacation home for future generations is another possible use of these trusts. Previously, the preferred structure for this purpose was a family limited liability company, owned in the revocable living trust of the original owners. At the original owners’ deaths, the LLC membership interests were distributed to each family member beneficiary. LLC members have certain rights in the company, and management of the LLC would always be an issue, especially if the original owner envisioned shared management among the lower generations. A detailed operating agreement to address maintenance and use of the property would be necessary.
This structure may be simplified somewhat by putting the family vacation home and some seed money in a purpose trust, and appointing a trustee to make sure the property is maintained and managed according to the trustmaker’s instructions, the trustee’s discretion, and the enforcer’s oversight. Family members could serve as enforcers, but so long as the Trustee followed the terms of the trust, none would have the ability to interfere with the trustee’s decisions, because the trustee owes his or her fiduciary duty to the trust itself, not to individual beneficiaries.
Continuance of a Business
Another possible application of this “purpose trust” would be the continuance of a closely-held business, when the original founder values support of a particular cause over individual gain. With a purpose trust, there is no obligation to maximize profits and make distributions. The trustee is free to continue the business, under the management of the company’s existing managerial team, using socially responsible, alternative methods of production or making charitable contributions. The founder’s mission for the company is kept alive, without having to worry about providing maximum profits to shareholders.
The Downsides of the New Trust
However, our new trust doesn’t come without a catch or two.
- For one thing, treading new ground means there is no jurisprudence surrounding the use of these trusts, and no real guidance regarding tax treatment.
- It is expected that any income earned in the trust will be taxed at the highest trust levels, with none of the usual deductions for distributions unless they qualify business expenses that are reported by another individual as income (such as wages).
- These trusts are irrevocable, so the trust maker cannot decide later to take the property out of trust. The trustees and the all-important trust enforcers are likely going to be compensated, which drains trust funds.
- The trust cannot last into perpetuity in Texas; it must end after 300 years. Contributing a property or business to a purpose trust does not obviate the need for detailed management succession planning.
Hammerle Finley is Here to Help You Understand Trusts
Despite the possible challenges, the Noncharitable Trust Without Ascertainable Beneficiary holds a lot of promise. It certainly opens the doors to a new way to accomplish goals that have nothing to do with enriching other people. Let’s see where we go from here!
If you’re interested in adding this trust to your estate plan, schedule a consultation with our team of expert attorneys.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
