Trust Decanting – A New Estate Planning Technique
Typically, an irrevocable trust is one whose terms cannot be changed after the agreement is signed and the trust is funded. The new trust code provides a number of methods to deal with this situation. One of these new tools is decanting. When decanting a trust, a trustee is exercising a power of appointment authorized under a trust instrument regarding distributions from the trust. These distributions are made to another trust, which is already in existence, or to a new trust created by the trustee. In order to determine the appropriate method to use, one must begin by determining whether the power that the trustee has to make distributions from the trust is subject to limited discretion or unlimited discretion.
Where the trustee has limited discretion, the trustee may appoint assets from the current trust (the “invaded trust”) to another trust (the “appointed trust”) for the benefit of the same current beneficiaries and the same successor and remainder beneficiaries. The invaded trust and the appointed trust must be subject to the same limitations on the trustee’s discretion to distribute. The main use of decanting in a limited discretion circumstance is to change administrative provisions in the trust agreement or repair errors that may have occurred in the document.
Where the trustee’s discretion is unlimited, the trustee may transfer all or a part of the trust principal to another trust. However, unlike the trust with limited discretion, the trustee may decant to another trust for the benefit of one, more than one, or all of the current beneficiaries of the current trust to the exclusion of any one or more of the current beneficiaries. Similarly, changes to who the successor and remainder beneficiaries are can be made by the trustee in this situation.
When decanting a trust, the trustee must exercise the power as a fiduciary who must exercise the authority in the best interests of one or more of the beneficiaries and as a prudent person would act.
In order to decant a trust, there must be a written instrument evidencing the exercise of the authority by the trustee. The instrument must be signed, dated and acknowledged by the trustee. The power is then effective 60 days after the date of delivery of notice discussed below unless the person who is entitled to notice agrees in writing to an earlier effective date or waives his or her right to object to the decanting in writing.
A copy of the document exercising the power, a copy of the new trust agreement for the appointed trust, and a copy of the trust agreement for the invaded trust must be delivered to (1) any person who has the right to remove and replace the trustee who is exercising the power, and (2) all persons who have an interest in the invaded trust. The document exercising the power must also advise whether it applies to all of the trust principal or only a part of the assets, and, if only a part, then the approximate percentage of the value of the trust principal of the invaded trust that is being appointed to the new trust.
Once notice has been received by a person entitled to receive notice, the person may object to the decanting by serving a written notice of objection on the trustee prior to the effective date of the decanting (60 days from the date of delivery of the notice). If no such objections to the decanting are received by the trustee within the 60-day period (unless an earlier effective date is agreed upon or the right to object is waived), the trustee can complete the transfers and is not liable to any person who received the required notice.
The new law also specifies what should occur in the event written objections are made. This may include resorting to a court proceeding to determine whether the decanting can be made. The person who objects to the decanting has the burden of proof in the court proceeding. Finally, the new law contains a number of prohibitions and limitations on the authority of the trustee who intends to decant a trust.
Trust decanting is an important new estate planning tool for dealing with an irrevocable trust where the parties wish to make certain permitted changes in order to facilitate planning objectives of the parties involved.