A Matter of Trust

Providing for ownership of a property through trusts can reduce tax consequences and court involvement with asset management—two primary goals in estate planning. Preparation of a trust agreement can be a more involved process than preparing a simple will, however, after going to the effort to create a trust, one wants it to work. This effort can be hindered by treating a trust like a business entity in document preparation.

Various documents necessary for real estate closings and other business transactions often require information that is not available until the proverbial eleventh hour. Of necessity, documents are prepared using forms from previous transactions. It does not work though, conceptually, to swap the names of a business entity and its signing officer with the names of a trust and its trustee.

This is because corporations, limited liability companies, and limited partnerships (the most commonly used business entities in Texas) are legally distinct entities. They have an existence that is separate from their owners and governing authority, and they directly own and transfer their assets. When an individual officer of a corporation signs documents on its behalf, the corporation is the party, acting through the officer. The officer does not become a party to the agreement by signing in this manner. This is not so, with trusts.

A trust is a relationship rather than a distinct legal entity. It is created by a trust agreement that provides for one or more trustees to own certain property, subject to specified requirements, for the benefit of beneficiaries. The trustee has legal title to all trust property, rather than the beneficiaries or non-entity trust. The trustee is therefore the proper party to buy and sell property covered by the trust. For purposes of entering into agreements and disposing of property, a trust is more similar to a sole proprietorship than a business entity. For example, "Alfred Pennyworth, Trustee of The Bruce Wayne Trust" would be the proper party rather than "The Bruce Wayne Trust".

In a recent unpublished opinion, Fugedi v. Initram, No. 21-40365 (5th Cir. 2022) the Fifth Circuit reversed the widely noted decision of the United States District Court for the Southern District of Texas (Galveston) in Fugedi v. United Rentals. (N.Am.) Inc. concerning a deed to a trust. The deed at issue named a trust, rather than its trustee, as the grantee, and the Galveston Court reached a harsh result in determining its validity.

The Galveston Court first held that the deed was void—not voidable, void—because it named a trust as a grantee. The Court based its reasoning on the well-settled legal principles that:

1. deeds without both an existing grantor and an existing grantee are void, and
2. a trust cannot own property because it does not exist as an entity.

The Galveston Court further held that the error in the deed was material, so it could not be cured with a correction instrument signed by someone other than both parties to the instrument being corrected under Texas Property Code 5.028.

The Court then reasoned that the requirements for a correction instrument addressing a material error under Texas Property Code 5.029 could not be met because the original grantee did not exist and therefore could not sign. This was an unforgiving result for an error that is not unusual to come across in practice. Not surprisingly, the Texas Land Title Association submitted an amicus brief in support of the appeal.

The Fifth Circuit reversed. First, it held that the deed could likely be saved on interpretation because the true party—the trustee of the named trust—could be ascertained from the document. The Fifth Circuit went on to hold that, if the original deed could not be reformed, then the error could be treated as non-material and corrected under Texas Property Code Section 5.028.

The reversal of the Fugedi case provides some comfort that it is not a fatal error if a trust rather than its trustee is named as a party in an instrument. Now, like Billy Joel sang in a totally different context than the analysis of the initial result in Fugedi: "But that can't happen to us." However, dealing with any errors can slow down closings, and the case is a good reminder of an error that can be avoided.