This month's article is the second part of our series about modifying irrevocable trusts. As we indicated in our last post, irrevocable trusts are just that, irrevocable. It is still important that the terms and consequences of creating and funding an irrevocable trust are carefully considered before an irrevocable trust is created. Changes in New Hampshire law have, however, simplified the process for the beneficiaries or the trustee to modify an irrevocable trust in certain circumstances. In last month's article, we discussed Nonjudicial Settlement Agreements, one method of modifying an irrevocable trust; this article will focus on the method of trust decanting. Finally, our next article will address a new method, trustee modification.
Just like decanting a bottle of wine, decanting a trust is the process of pouring assets from one container into a new container, in an effort to breathe new life into an old trust. New Hampshire's version of the Uniform Trust Code, RSA 564-B, specifically provides the statutory authority for a trustee to decant. This past summer, the section authorizing decanting was revised, clarified and further expanded.
The decanting process is initiated unilaterally by the trustee, unlike a Nonjudical Settlement Agreement where it is the beneficiaries agreeing to act. A trustee has the authority to decant some or all the assets contained in a trust to a new trust, regardless of whether that trustee has any discretion in making distributions of income or principal to the beneficiaries.
Decanting can allow the trustee to make changes to unfavorable provisions in the old irrevocable trust by creating a new trust with different provisions. The term of the new trust may also be longer than the term of the original trust. For example, an old trust which provides for distributions to a beneficiary at the age of 21 could be extended to provide for distributions at 30 or 65 or even provide that the trust will be held for the lifetime of the beneficiary. The new trust may change the standard with which a trustee may distribute income or principal from the trust to the beneficiaries. For example, to allow for greater flexibility the new trust may provide that a Trustee can make distribution to a beneficiary in the Trustee's sole and uncontrolled discretion, when the old trust allowed for distributions only for a beneficiary's health, education, maintenance and support. Modifications to the identity of the successor trustees are possible as are changes to the administrative provisions of the trust. Additionally, while the new trust cannot include new beneficiaries, it may exclude one or more of the previously-identified beneficiaries of the old trust.
The ability of a trustee to decant trust assets into a new trust can be very helpful. However, careful consideration must be given to the fact that the trustee has a fiduciary duty to all beneficiaries of a trust and must act accordingly.
There are also express limitations on a trustee's ability to decant. These include that the trustee has a duty to exercise the power to decant in a manner consistent with the original grantor's intent as expressed in the original trust; therefore, the terms of the new trust may not be inconsistent with a material purpose of the original trust. Second, the trustee must act in accordance with the trustee's fiduciary duties both in the original trust and under the law. Third, the new trust cannot eliminate a 'œvested interest of a beneficiary.' A 'œvested interest,' includes a mandatory distribution of income or principal, a right to an annuity or unitrust payment, a currently exercisable power of withdrawal, and a right to receive a portion of the trust at the termination of the trust. Finally, if the trustee is also a beneficiary of the trust and will be a beneficiary of the new trust the rules for decanting are more restrictive.
If the new trust meets the requirements, the process is fairly straightforward. First, the trustee or a grantor creates a new trust. Next, the trustee directs the decanting. Finally, once the trustee has directed the decanting the trustee can move the assets from the old trust to the new trust.
The trustee is not required to seek court approval, or the consent of the grantor or the beneficiaries. And, while a trustee does not have a duty to inform any beneficiary of a proposed decanting, if the trustee does inform the beneficiaries, the beneficiaries' ability to object can be limited.
Decanting has become an extremely useful tool in the right circumstances. We use decanting, along with Nonjudical Settlement Agreements, with increasing frequency to solve problems that come up with the administration of trusts. If you have a matter that you think could be resolved by decanting, call the office and schedule an appointment. We would be happy to help you.