A Texas trust, including a Texas gun trust, may not exist where a single trustee is also the sole beneficiary. When this occurs the legal title and the beneficial interest merge. The trustee/beneficiary holds the property free of trust. “[O]ne of the most fundamental requirements for the creation of a trust is that the legal and equitable interests in the trust’s property be vested in different people.” Denton v. Seals, 169 B.R. 612,615 (Bkrtcy. W.D. Tex. 1994). This law has been codified in the Texas Property Code which provides that:
§ 112.034. MERGER.
(a) If a settlor transfers both the legal title and all equitable interests in property to the same person or retains both the legal title and all equitable interests in property in himself as both the sole trustee and the sole beneficiary, a trust is not created and the transferee holds the property as his own. This subtitle does not invalidate a trust account validly created and in effect under Chapter XI, Texas Probate Code.
(b) Except as provided by Subsection (c) of this section, a trust terminates if the legal title to the trust property and all equitable interests in the trust become united in one person.
(c) The title to trust property and all equitable interests in the trust property may not become united in a beneficiary, other than the settlor, whose interest is protected under a spendthrift trust, and in that case the court shall appoint a new trustee or cotrustee to administer the trust for the benefit of the beneficiary.
The practical effect of such a merger in a poorly drafted NFA gun trust is the invalidation of the trust. This renders the trustee in unlawful possession of any NFA (Class 3) items such as machine guns or suppressors which the trust may have acquired. This problem may also subject the trustee to a fine and criminal penalties. Many laymen purchasing internet trusts or copying ones belonging to friends often make this fatal Class 3 gun trust drafting error. There is no substitute for hiring an experienced Texas gun trust lawyer to avoid this type of problem and draft a durable and valid Class 3 gun trust.
Bankruptcy Judge Leif M. Clark of San Antonio, Texas, made a ruling on February 23, 2012, holding that the Karen Ann Vasquez Revocable Living Trust dated August 15, 2003, was not a valid trust because the Debtor “is both the sole trustee and the sole beneficiary of the Trust, and thus the legal and equitable interests impermissibly lie in the same person.” 2012 WL 601593, Bkrtcy.W.D.Tex., February 23, 2012 (NO. BR 11-52988). Judge Clark followed a similar ruling by the Fourth Court of Appeals in San Antonio, Texas, Shands v. Texas State Bank, 2001 Tex. App. LEXIS 109, at *9 (Tex. Civ. App. – San Antonio Jan. 10, 2001) (unpublished) holding that “[I]f there is a failure to achieve and sustain a split of legal and equitable title, merger will occur. If a settlor transfers both the legal title and all equitable interests in property to the same person or retains both the legal title and all equitable interests in the property himself as both the sole trustee and the sole beneficiary, the trust is not created and the transferee holds the property as his own. Normally, a trust will terminate if the legal title to the trust property and all equitable interests in the trust become united in one person.” Citing Section 112.034(b).
To avoid a merger of legal title and beneficial interest a well drafted Texas gun trust must not have a sole trustee designated as the only beneficiary. Naming several beneficiaries will solve this simple but potentially fatal gun trust drafting problem.
