Recanting a Trust

Decanting lets trustees re-write irrevocable trust agreements by figuratively pouring the assets from an old trust into a new one.

If you’re working with an irrevocable trust that needs fixing for some reason and the trust agreement includes an “absolute” power to invade trust principal, your first thought should be to simply re-write the trust by using Florida’s “decanting” statute.

Decanting lets trustees re-write irrevocable trust agreements by figuratively pouring the assets from an old trust into a new one. Under Florida’s decanting statute, an “absolute” power to invade principal means a power that’s not limited to specific or ascertainable purposes, such as health, education, maintenance, and support (“HEMS”), whether or not the term “absolute” is used.

Decanting is all the rage in estate planning circles, as it should be: it’s a legislatively-sanctioned way to privately re-write an irrevocable trust without going through the costs and delays inherent to a judicial modification proceeding. (Yes, this all gets done out of court.) For a solid general introduction to decanting you’ll want to read Decanting is Not Just for Sommeliers, recently co-authored by Texas law prof. Gerry W. Beyer. Here’s an excerpt:

Times change, needs change, and laws change thus giving a trustee motivation to decant. Examples of reasons to decant include to:

  • Correct a drafting mistake;
  • Clarify ambiguities in the trust agreement;
  • Correct trust provisions, due to mistake of law or fact, to conform to the grantor’s intent;
  • Update trust provisions to include changes in the law, including new trustee powers;
  • Change situs of trust administration for administrative provisions or tax savings;
  • Combine trusts for efficiency;
  • Allow for appointment or removal of trustee without court approval;
  • Allow for appointment of a special trustee for a limited time or purpose;
  • Change trustee powers, such as investment options;
  • Transfer assets to a special needs trust;
  • Adapt to changed circumstances of beneficiary, such as substance abuse and creditor or marital issues, including modifying distribution provisions to delay distribution of trust assets;
  • Add a spendthrift provision;
  • Divide a “pot trust” into separate share trusts;
  • Partition of trust for marital deduction or generation-skipping (GST) transfer tax planning.

In trusts and estates circles, you know you’re on to a good thing when an idea’s codified by lots of state legislatures, which is exactly what’s happened with decanting. In 1992 New York became the first state to enact a decanting statute. As of 2014, at least 22 states have followed suit (including Florida). For more on how to navigate Florida’s particular brand of trust-decanting statute you’ll want to read Fixing Old Trusts and Exploiting New Opportunities: Florida’s Decanting Statute by Boca Raton attorney Thomas Katz.

And last but not least, before you pull the trigger on one of these transactions you’ll want to do a deep dive into all the potential tax traps that seem to bedevil estate planners at every turn. Don’t count on a PLR for cover; the IRS recently issued Rev. Proc. 2014-3, which placed decanting on its “no-ruling” list for most of the income, gift, and GST-tax issues you’d be interested in. Pending IRS guidance and case law developments, to wrap your arms around the possible tax effects of  a decanting you’ll want to read An Analysis of the Tax Effects of Decanting, co-authored by tax super star Jonathan Blattmachr.

This information is not intended to be tax or legal advice, and it may not be relied 
on for the purpose of avoiding any federal tax penalties. You are encouraged to seek 
tax or legal advice from an independent professional advisor.
  • Two recent cases decided by the Supreme Judicial Court, Morse v. Kraft (466 Mass. 92, 2013) and Ferri v. Powell-Ferri (476 Mass. 651, 2017), have confirmed and arugably expanded the power of trustees to transfer trust assets to new trusts to better carry out the goals of the trust grantors in creating the trusts in the first place.

    The Ferri case permitted the trustee to transfer funds into a new, more restrictive trust even though the trust beneficiary had the right to withdraw the funds from the original trust, since the trustee had the power to distribute the funds to other beneficiaries.

    Ferri Results in Case Reversal

    In light of the Ferri decision, Judge Joan P. Armstrong of the Suffolk Probate and Family Court recently reversed her earlier decision in the case of Charter Trust Co., et al. v. Kenneth Malcolm Jones, et al. (Suffolk Probate Ct., SU-16E-0082, August 11, 2017) and now permits decanting despite the objection of the Massachusetts Department of Revenue. In her original decision handed down on January 30, 2017, Judge Armstrong reasoned that the trust could not be decanted because a beneficiary of the original trust had a right to income. Even though the trustee had the right to distribute principal to other beneficiaries, decanting would unfairly terminate the income beneficiary’s interest.

    However, in light of Ferri, which permitted a beneficiary’s interest to be curtailed despite a right of withdrawal, Judge Armstrong now reasons that the right to income is analogous to the right of withdrawal and decanting is permitted. Her language is instructive:

    It is particularly instructive to this Court that the trust language in Ferri was found to afford the trustee “extremely broad authority and discretion,” even where the beneficiary was permitted to unilaterally withdraw gradually increasing portions of the trust res according to a specifically delineated schedule based on the beneficiary’s age, and where the trustee had no discretion to withhold these payments if requested. [cite omitted] The beneficiary’s withdrawal rights did not limit the trustee’s power to decant, even where the effect of decanting was to wholly strip the beneficiary of these rights, . . .

    In other words, if the trustee has a so-called “spray” provision permitting distributions of principal to one or more beneficiaries, the trustee can transfer or “decant” the funds into a new trust for one or more of the same beneficiaries, even curtailing rights such beneficiaries already have.

    Implications for MassHealth Trusts

    This has some relevance to MassHealth asset protection trust which have come under attack in recent years by MassHealth picking at various provisions which it believes give the grantors access to principal. Where the trustees have the right to distribute principal, it now is clear that they also have the right to decant to new trusts that would survive attack by MassHealth.

    For instance, many trusts give the parents the right to trust income or the right to reside in real estate owned by the trust, but the trustee also has the right to distribute the trust property to the children or grandchildren. In those cases, it’s now clear that the trustee may decant the trust to a new trust for the benefit of the children or grandchildren whether or not it preserves the parents’ interest in the trust income or right to live in the trust real estate. The new trust could be identical to the old one, simply eliminating the provisions that have come under MassHealth attack.

    The only question is whether MassHealth would deem such decanting to be a transfer of assets causing a new five-year period of ineligibility for benefits. There are two responses to that argument: First, that the original trust was fine as it was, so if the trust funds were noncountable in the first place, any transfer does not affect the grantor’s eligibility for MassHealth. Second, even if the assets in the original trust were considered to be countable, the grantor does not control the trustee so the trustee’s action in decanting the trust should not be deemed a transfer for the grantor. I’m sure we’ll see how these arguments play out as the cases are litigated in the coming years.