Trust Decanting: Flexibility and Danger Achieving Tax Benefits, - - PowerPoint PPT Presentation

Trust Decanting: Flexibility and Danger

Achieving Tax Benefits, Revising Fiduciary Powers, and Mitigating Trustee Liability

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TUESDAY, OCTOBER 2, 2012

Presenting a live 90-minute webinar with interactive Q&A

James P . Spica, Member, Dickinson Wright, Detroit Meryl G. Finkelstein, Sr. Counsel, Fulbright & Jaworski, New York Thomas R. Pulsifer, Partner, Morris Nichol Arsht & Tunnell, Wilmington, Del. Todd A. Flubacher, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del.

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STRAFFORD PUBLICATIONS WEBINAR

Trust Decanting: Flexibility and Danger

Thursday, October 2, 1:00-2:30 PM (EDT)

THE USES AND BENEFITS OF DECANTING AND DECANTING’S CONCEPTUAL BASIS IN THE COMMON LAW

James P. Spica Dickinson Wright PLLC Detroit 313-223-3090 jspica@dickinsonwright.com

THE USE OF ‘DECANTING’: A LOOSE METAPHOR

FIDUCIARY AND NON-FIDUCIARY POWERS OF APPOINTMENT

By ‘Trust Decanting,’ we generally mean the exercise of a fiduciary, special power of appointment to distribute assets from one trust to another This use of the term is under-determined by the metaphor on which it’s based The analogy to pouring spirits from one vessel to another is apt enough, but there’s no analogue in the decanting of spirits to our narrow reference to fiduciary powers: oenophiles know that one doesn’t need a sommelier to decant wine; and similarly, in the right circumstances, a beneficial, special power of appointment may be as good as a fiduciary one for moving assets from one trust to another 6

THE USE OF ‘DECANTING’: A LOOSE METAPHOR

POWERS OF APPOINTMENT BY ANY OTHER NAME

There are also powers of appointment we’re not in the habit of calling powers of appointment that can be used to move assets from one trust to another, or to achieve practically equivalent effects. These include:

• powers of substitution (of the kind regularly used to attract “grantor trust”

status),

• powers of amendment,
• powers of revocation or termination and
• disclaimers

7

THE USE OF ‘DECANTING’: A LOOSE METAPHOR

POWERS TO DO THINGS OTHER THAN APPOINT

And there are means of effectively “moving” assets from one trust to another that have nothing to do with powers of appointment (nor, indeed, with the movement of assets), including:

• reformation or modification proceedings and
• trust mergers

8

THE USES OF DECANTING

TO DECANT (ASSUMING ONE CAN) OR NOT TO DECANT

Whether “decanting” (in its narrow, if metaphorically under-determined sense) is a better means of “moving” trust assets than

• a beneficiary’s, special power appointment,
• a power of substitution,
• a power of amendment, revocation or termination,
• a disclaimer
• a reformation or modification proceeding or
• a merger of trusts

will often depend on one’s particular motivations, on why exactly one wishes that the trust terms governing the assets in question were different 9

THE USES OF DECANTING

COMMON MOTIVATIONS

Common motivations for decanting include wishes:

• to correct drafting errors or revise accurately rendered, but ill-advised

provisions, e.g., a hobbling tax or perpetuities saving clause

• to enhance administration, e.g., by bifurcating fiduciary functions so as

to protect a less sophisticated, but integral trustee from investment responsibility

• to address unanticipated circumstances concerning a beneficiary’s

creditors, marital status, wealth or health, e.g., by creating a supplemental needs trust so as to allow a beneficiary to qualify for public assistance

• to change a trust’s vintage so as to put the beneficiaries’ interests in the

way of prospective legislative innovations, e.g., perpetuities reform 10

THE USES OF DECANTING

COMMON MOTIVATIONS (CONTINUED)

• to change situs or governing law
• to supplement inadequate trustee provisions, e.g., by distinguishing the

administrative powers of interested and disinterested trustees

• to engineer income tax consequences, e.g., by granting the settlor a

power that‘ll trigger grantor trust status, or by spinning off capital loss assets for sale by a separate trust that can promptly be terminated in distributions to beneficiaries who have capital gains

• to increase the longevity of transfer tax advantages, e.g., by tying the

termination of a trust “grandfathered” under Treasury’s GST tax effective date regulations to the durations of extraneous measuring lives

• r by evading perpetuities constraints all together for trust assets to

which GST exemption has been allocated 11

THE BENEFITS OF DECANTING

COMPARING ALTERNATIVE MEANS

As the common motivations we’ve described fairly suggest, one’s reasons for wishing that particular trust terms governing particular assets were different will often implicate possible alternative means of achieving preferable results The point is that in many cases, decanting may be superior to other means at hand; and that, in any case, one has to compare the relevant alternatives 12

THE BENEFITS OF DECANTING

ILLUSTRATION 1: DECANTING VS. EXERCISE OF A BENEFICIAL POWER WHEN THE NEW TRUST WILL GRANT POWERS OF APPOINTMENT

As between the use of a fiduciary, special power of appointment (i.e., “decanting”) and a nonfiduciary one (i.e., a trust beneficiary’s power), for example, one has always to reflect that the nonfiduciary power may implicate the so-called “Delaware tax trap,” IRC section 2041(a)(3) and its gift tax counterpart, IRC section 2514(d); whereas the legislative history of these sections indicates that the “trap” wasn’t intended to apply to purely fiduciary powers of appointment, such as a trustee’s discretionary power to invade principal See S. REP. No. 82-382, at 1 (1951), as reprinted in 1951 U.S.C.C.A.N. 1535, 1535 13

THE BENEFITS OF DECANTING

ILLUSTRATION 2: DECANTING VS. MERGER WHEN THE MERGER STATUTE REQUIRES SEGREGATION

Another example is the case of longevity planning for tax advantaged trust assets when the goal is to subject beneficial interests in the assets to a more favorable perpetuities regime In that case, use of a special power of appointment, whether a fiduciary power (i.e., “decanting”) or a nonfiduciary one (i.e., a trust beneficiary’s power), may be superior to merger of the existing trust―or a part of the existing trust, following a strategic trust division―with a new trust that qualifies for the desiderated perpetuities treatment if the applicable merger statute requires post-merger segregation of distinct perpetuities parcels Under the Michigan Trust Code’s merger provision, for example, the merger of a trust that’s subject to the Michigan USRAP with a trust to which the Personal Property Trust Perpetuities Act applies may well not subject the assets of the earlier trust to the reformed perpetuities regime See MICH. COMP. LAWS ANN. § 700.7417(2) (“[i]f the rule against perpetuities speaks from different dates with reference to the trusts . . . .”) 14

THE BENEFITS OF DECANTING

ILLUSTRATION 3: DECANTING VS. CONSENSUAL MODIFICATION OF A TRUST

“GRANDFATHERED” FROM GST TAX

Another example is the case of longevity planning for “grandfathered” status under the Treasury’s GST tax effective date regulations In this case, perpetuity isn’t in point, because the effective date regulations subject the tax advantage of grandfathered status to a RAP of their very

• wn, one that’s completely independent of state law

See Treas. Reg. §§ 26.2601-1(b)(1)(v)(B) (nonfiduciary, special powers of appointment); 26.2601-1(b)(4)(i)(A) (fiduciary, special powers) 15

THE BENEFITS OF DECANTING

ILLUSTRATION 3 (CONTINUED): DECANTING VS. CONSENSUAL MODIFICATION OF A TRUST “GRANDFATHERED” FROM GST TAX

But the regulations:

• contemplate that the exempt status of assets subject to a grandfathered

trust may survive the assets’ being appointed to a new trust, provided the appointment may not postpone or suspend the vesting (or absolute

• wnership or power of alienation) of an interest in the assets beyond the

Regulatory RAP period (see Treas. Reg. § 26.2601-1(b)(1)(v)(D)(ex. 4) (especially the last sentence)) and

• permit the use of extraneous measuring lives with respect to the

exercise of – a nonfiduciary, special power of appointment (see id. § 26.2601- 1(b)(1)(v)(B)(2)) and – a fiduciary, special power (i.e., “decanting”) provided the terms of the grandfathered trust or state law at the time the grandfathered trust became irrevocable authorized the distribution to a new trust without the consent or approval of any beneficiary or court (see id. § 26.2601-1(b)(4)(i)(A)) 16

THE BENEFITS OF DECANTING

ILLUSTRATION 3 (CONTINUED): DECANTING VS. CONSENSUAL MODIFICATION OF A TRUST “GRANDFATHERED” FROM GST TAX

The regulations also contemplate that the exempt status of assets subject to a grandfathered trust may survive the assets’ being distributed to a new trust,

• r retained in a trust that is modified, pursuant to a non-contested court
• rder or non-judicial settlement

But in that case, the distribution or modification must neither:

• shift a beneficial interest in the trust to any beneficiary who occupies a

lower generation (as defined in IRC section 2651) than the person or persons who held that beneficial interest beforehand nor

• extend the time for vesting of any beneficial interest in the trust

beyond the period provided for in the original trust See Treas. Reg. § 26.2601-1(b)(4)(i)(D) 17

THE BENEFITS OF DECANTING

ILLUSTRATION 3 (CONTINUED): DECANTING VS. CONSENSUAL MODIFICATION OF A TRUST “GRANDFATHERED” FROM GST TAX

The upshot is that:

• whereas a special power of appointment, whether a fiduciary power

(i.e., “decanting”) or a nonfiduciary one (i.e., a trust beneficiary’s power), may afford scope for longevity planning for a grandfathered trust―because the Treasury regulations allow an appointment to suspend vesting for a period determined by extraneous measuring lives;

• there’s no scope for such planning with respect to modifications or

distributions pursuant to non-contested court orders or non-judicial settlements, for in these cases, the modification or distribution isn’t allowed to extend the period for vesting of interests in the grandfathered trust’s assets at all 18

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

THE VINTAGE OF POWER

This last illustration, the case of longevity planning for trusts “grandfathered” under the GST tax effective date regulations, emphasizes the potential, tax- planning importance in every common law jurisdiction, regardless of the enactment of a decanting statute, of common law authority for “decanting” For, as we’ve seen, the scope for longevity planning for a grandfathered trust may depend on the use of extraneous measuring lives And the use of extraneous measuring lives may depend on the existence of a fiduciary, special power of appointment (if the trust in question doesn’t provide nonfiduciary, special powers) And in that case, unless the trust instrument itself provides that the trustee may extend the life of the trust or make distributions in further trust, state law at the time the grandfathered trust became irrevocable must have authorized the distribution to a new trust without the consent or approval of any beneficiary or court See Treas. Reg. § 26.2601-1(b)(4)(i)(A) (supra Slide 16) 19

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

THE VINTAGE OF POWER (CONTINUED)

Now, it won't be oversimplifying for our purposes to say that a “grandfathered” trust is one that was irrevocable on September 25, 1985 (see Treas. Reg. § 26.2601-1(b)(1)(i)) And the oldest decanting statute in the country, New York’s original version, was enacted in 1992 (see N.Y. EST. POWERS & TRUST LAW § 10-6.6 (McKinney 2002)) So, unless the trust instrument expressly authorizes decanting, the scope for the longevity planning we’ve described (having to do with the use of extraneous lives) depends, in every common law jurisdiction, on the plausibility of the claim that given the terms of the grandfathered trust, the common law authorizes the trustee to make distributions in trust for the benefit of permissible distributees 20

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

THE RESTATEMENTS (SECOND) AND (THIRD)

A trustee's discretionary power of distribution is a special power of appointment within the meaning of most states’ powers of appointment laws (see, e.g.,

• MICH. COMP. LAWS ANN. §§ 556.112(c); .112 (i))

This tracks the treatment of a trustee’s power to make discretionary distributions in the Restatements (Second) and (Third), which provide that unless the trust instrument that created the discretionary power manifests a contrary intent, a trustee’s power to make discretionary distributions entails the powers:

• to make distributions in trust for permissible distributees and
• to create powers of appointment over trust assets

(see RESTATEMENT (SECOND) OF PROP.: DONATIVE TRANSFERS § 19.3 cmt. a

• illus. 2 (1986); RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE

TRANSFERS § 17.1 cmt. g (2011)) 21

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

CASE LAW

There may or may not be any case authority in a given jurisdiction for the proposition thus supported by the Restatements (viz., that at common law, a discretionary power to distribute trust property presumptively implies the power to “decant”) In Florida, the proposition is strongly supported by Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940) And in New Jersey, Wiedenmayer v. Johnson, 254 A.2d 534 (N.J. Super Ct.

• App. Div. 1969) seems to imply the proposition

But here is, for example, as far as the author knows, no decided case binding as precedent on Michigan or Ohio judges that clearly stands for that proposition 22

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

CASE LAW

On the other hand, the mere absence of binding case authority in a jurisdiction cannot establish the absence of a common law basis for decanting there, since the method of common law adjudication obviously cannot be deduced from the doctrine of precedent alone Thus, the absence of local precedent did not prevent the Ohio legislature from asserting that its decanting statute is partly declarative of common law applicable prior to enactment (see OHIO REV. CODE ANN. § 5808.18(O)(1) (2012)) 23

DECANTING’S CONCEPTUAL BASIS IN COMMON LAW

SEGUE TO STATE STATUTES

And, indeed, a legislative decanting regime for Michigan, which the author has drafted on behalf of Greenleaf Trust and which is currently embodied in 2012 Michigan Senate Bill Nos. 978, 979 and 980, purports to be partly declarative But the declaratory aspirations of these very recent statutes (a fledgling in Ohio and one still in the womb of the Michigan legislature) must serve as our segue from the common law to a survey of decanting legislation, for which Meryl Finkelstein will be our guide 24

77933058.1

Strafford Publications Webinar Tuesday, October 2, 2012

TRUST DECANTING: FLEXIBILITY AND

DANGER Achieving Tax Benefits, Revising Fiduciary Powers, and Mitigating Trustee Liability The State Decanting Statutes

Meryl G. Finkelstein Fulbright & Jaworski L.L.P. 666 Fifth Avenue New York, NY 10103 Telephone: (212) 318-3301 Facsimile: (212) 318-3400 mfinkelstein@fulbright.com www.fulbright.com

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77933058.1

A decanting statute permits a trustee who has the discretionary authority to invade the principal of a trust (and in some cases trust income) for the benefit of one or more trust beneficiaries to exercise that authority by transferring some or all of the assets of the trust in further trust. The rationale underlying a trust decanting is that a trustee who has the discretion to make an outright distribution of trust property to or for the benefit of one or more current beneficiaries of the trust has a special power of appointment over the trust property that allows the trustee to distribute the property to another trust for the benefit of one or more beneficiaries of the trust. Seventeen states have enacted specific decanting legislation and at least 3 other states have proposed statutes. As a general rule, a state decanting statute should apply to a trust unless the terms of the instrument creating the first trust specifically state to the contrary. Only 2 state statutes (Indiana and Rhode Island) actually use the word “decanting” in their titles. Most statutes refer to the trustee’s invasion or distribution power or the trustee’s power to appoint to another trust.

INTRODUCTION

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CURRENT AND PROPOSED STATUTES

77933058.1

1. The proposed decanting must be consistent with the trustee’s fiduciary duties of loyalty and impartiality. 2. Before undertaking a decanting, the trustee must thoroughly review the trust instrument. All of the state decanting statutes should apply unless the trust agreement provides to the contrary or the relevant statute specifically excludes the type of trust that is the subject of the proposed decanting. a. If the trust instrument prohibits the trustee from decanting the trust, then the trustee should not act absent court authorization. b. If the trust instrument gives the trustee specific power to decant the trust, then the trustee should confirm that the proposed decanting is consistent with what the trust instrument allows. c. Alternatively, the decanting power under the trust instrument may make it clear that it is not intended to abridge the trustee’s power under state law, in which case the state decanting statute should also apply. 3. If the trust instrument creating the first trust is silent, then the trustee must confirm whether he has the requisite power under the applicable state decanting statute. 4. In addition, issues may arise in determining which state’s law applies to the first trust, particularly if the situs

• r governing law of the trust was changed prior to the proposed decanting.

5. If the decanting will be effectuated under the applicable state decanting statute, then the trustee must confirm that the exercise of the decanting power will comply with all statutory requirements.

THRESHOLD CONSIDERATIONS FOR THE TRUSTEE

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77933058.1

All of the state decanting statutes are intended to achieve the same result – to allow the trustee to appoint the assets of an existing trust to a second trust – but their substantive provisions differ in a variety of ways, including: 1. The level of discretion that the trustee must have with respect to the power to invade the first trust (i.e., trusts where the trustee has absolute discretion to make distributions versus trusts with distribution standards). 2. Whether a decanting may be based solely on a power to invade trust income. 3. The persons for whose benefit the power to invade the first trust may be exercised and the persons who are permissible beneficiaries under the second trust. 4. Whether powers of appointment not granted under the first trust may be granted to a beneficiary under the second trust. 5. Limitations on the trustee’s exercise of the decanting power that are intended to preserve certain tax benefits of the first trust such as marital and charitable deductions, gift tax annual exclusions, sub-S elections and allocations of generation-skipping transfer tax (“GST”) exemption. 6. Restrictions on the ability of a beneficiary-trustee to decant a trust. 7. The procedural aspects of the trustee’s exercise of the decanting power, including:

• a. Method of exercise
• b. Notice to beneficiaries, contents of the notice and waivers of notice or the notice period
• c. Beneficiary consent
• d. Court approval and/or court filing requirements

STATUTORY DIFFERENCES

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1. Three state decanting statutes -- Florida, Indiana and Rhode Island – require that the trustee have the absolute discretion

• r power to distribute trust principal in order to decant an existing trust.

2. What constitutes absolute discretion or power under the Florida, Indiana and Rhode Island statutes?

• Absolute discretion or power is one that is not limited to specific or ascertainable purposes such as HEMS. The Florida and

Rhode Island statutes make it clear that a power to invade for the best interests, welfare, comfort or happiness of a beneficiary does not constitute a standard. 3. All of the other state decanting statutes permit a trustee to decant the existing trust where the trustee’s distribution or invasion power is limited by a standard. 4. If the trustee’s discretion under the first trust is limited by a standard, the decanting statute must be reviewed carefully to determine whether the same standard must be included in the second trust.

• The Alaska, Illinois, Missouri, New York and North Carolina statutes all require that the same standard be included in the

second trust and most also require that it be exercisable in favor of the same beneficiaries as provided under the first trust.

• The New York statute also provides that if the term of the first trust is extended in the second trust, then during the entire

extended term of the second trust, the second trust must retain the original standard set forth in the first trust, but the second trust may additionally provide for unlimited discretion once the initial term under the first trust has expired.

• The Arizona and Kentucky statutes require that the same or a more restrictive standard be included in the second trust where

the trustee exercising the distribution power is a possible beneficiary under the standard.

• Under the Ohio statute, if the trustee’s discretionary distribution power is limited by a standard, the trustee’s exercise of its

distribution power will only be valid if the second trust does not materially change the interests of the beneficiaries of the first trust (if the trustee’s power is unlimited, then beneficial interests under the first trust can be materially changed under the second trust).

• Under the Virginia statute, where the first trust contains an ascertainable standard for distributions, the second trust must

include the same standard unless a court approves a change in or elimination of the standard and the standard must be exercised in favor of the same current beneficiaries as set forth in the first trust.

• Under the Delaware statute, the trustee’s exercise of the invasion power must comply with any standard that limits the trustee’s

authority to make distributions from the first trust (example – if the first trust has a 5% annual distribution limit, then only 5% of the assets can be decanted).

SCOPE OF THE TRUSTEE’S INVASION POWER UNDER STATE LAW

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SCOPE OF THE TRUSTEE’S INVASION POWER UNDER STATE LAW

(continued)

5. In a number of states, a decanting may be based on a trustee’s discretionary power to distribute trust income, not just principal.

• The Kentucky, Missouri, Nevada, North Carolina, South Carolina, South Dakota, and Virginia statutes all specifically

apply to a trustee’s power to distribute trust income or principal.

• The Arizona and New Hampshire statutes refer only to the power to make distributions, which includes both principal

and income.

• In Alaska, the trustee’s power to invade principal of the first trust must be exercised for the benefit of a beneficiary who

is also an actual or potential income beneficiary of the first trust.

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77933058.1

One of most difficult issues arising with respect to trust decantings is determining the identity of the permissible beneficiaries of the second trust and to what extent the beneficiary provisions of the first trust may be varied in the second trust. Questions that typically arise in this context are:

• 1. Whether current beneficiaries under the first trust can be eliminated in the second trust:
• Under all of the statutes, the answer appears to be yes where the trustee has an unlimited distribution power or absolute

discretion.

• Note that in several states, including Illinois, New York, North Carolina, Ohio and Virginia, if the trustee does not have

absolute discretion, then the interests of current beneficiaries of the first trust may not be eliminated in the second trust.

• 2. Whether remainder beneficiaries in the first trust can be eliminated in the second trust:
• This is not explicitly addressed under most of the statutes, but most commentators take the position that if the interest of a

current beneficiary can be eliminated under the statute, the interest of a future or remainder beneficiary also can be eliminated.

• The Illinois, New York and Ohio statutes specifically provide that remainder interests can be eliminated only where the trustee
• f the first trust has absolute discretion. If the trustee of the first trust does not have absolute discretion, then the interests of

remainder beneficiaries of the first trust may not be eliminated in the second trust.

• 3. Whether the interests of remainder beneficiaries of the first trust can be accelerated to present interests in the

second trust:

• The Missouri and South Dakota statutes specifically permit the acceleration of remainder interests.
• Although most of the statutes are silent, if the power to invade the principal of the first trust must be exercised in favor of one
• r more current beneficiaries of first trust, it follows that the acceleration of remainder interests should not be permitted.
• The Kentucky, North Carolina and Virginia statutes all specifically prohibit the acceleration of remainder interests. This is also

implied under other statutes (such as Delaware).

PERMISSIBLE BENEFICIARIES OF THE SECOND TRUST

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4. Can the second trust add as beneficiaries persons who are not beneficiaries under the first trust.

None of the statutes specifically permit the addition of beneficiaries in the second trust and most of the statutes specifically state that the beneficiaries of the second trust may include only beneficiaries of the first trust. The New Hampshire statute specifically provides that the second trust may not include a beneficiary who is not a beneficiary

• f the first trust.

5. Some statutes permit the second trust to grant a power of appointment not provided for under the first trust, effectively allowing the addition of beneficiaries through the exercise of the power of appointment.

The Delaware, Illinois, Kentucky, Nevada, New York, North Carolina, Ohio, South Dakota and Virginia statutes all permit the second trust to grant a power of appointment (usually including a general power of appointment) not provided for in the first trust to a beneficiary of the second trust. Under these statutes, the potential appointees under the power of appointment do not have to be beneficiaries of either the first trust or the second trust.

Under some statutes, limitations apply:

• Under the Illinois and Ohio statutes, the trustee must have absolute discretion to distribute trust principal in order to

include a power of appointment in the second trust.

• The Illinois statute also requires that the beneficiary who is given the power of appointment be a beneficiary who could

have received an outright distribution of the property.

• New York allows a beneficiary under the first trust to be granted a power of appointment in the second trust that is not in

the first trust where the trustee has absolute discretion and the beneficiary could have received the entire principal of the first trust outright. In such a case, the potential donees of the power must be unlimited (i.e., the power must be exercisable in favor of anyone in the world except where the beneficiary, the grantor or grantor’s spouse would have a general power of appointment).

33

PERMISSIBLE BENEFICIARIES OF THE SECOND TRUST

(continued)

77933058.1

The statutes also preserve certain provisions contained in the first trust, particularly as they relate to maintaining tax benefits of the first trust and certain fixed or mandatory interests of the beneficiaries of the first trust such as income interests and rights of withdrawal.

1. All of the state decanting statutes prohibit the reduction (or elimination) of fixed or mandatory income interests under the first trust.

• In Delaware and South Dakota, this restriction applies only where the first trust is a marital trust.
• In Illinois, Nevada, New Hampshire, New York and Ohio, only current income interests, not future income interests are specifically protected.

This is implied under the Missouri statute.

• The Kentucky statute protects both current and future fixed income interests.
• In addition, many statutes such as Arizona, Florida, Indiana, Illinois, Nevada, Kentucky, New Hampshire, New York, North Carolina,

Ohio, Rhode Island and Virginia also prohibit the reduction or elimination of annuity and/or unitrust interests, but note:

• In Delaware, a unitrust interest cannot be reduced or eliminated only if the first trust is a marital trust.
• In Missouri income and unitrust/annuity interests cannot be reduced in marital trusts, CRTs, GRATs and trusts holding sub-S stock.
• In South Dakota this limitation applies to CRTs and GRATs.

2. Many statutes contain provisions preserving specific tax benefits of the first trust:

• Marital and charitable deductions are specifically protected under the Florida, Indiana, Illinois, Kentucky, Nevada, New Hampshire, New

York, North Carolina, Ohio, Rhode Island and Virginia statutes. In these states, the second trust cannot include any provision which, if included in the first trust, would have prevented it from qualifying for such deduction. Under the Ohio statute, the second trust also cannot

• mit any such provision.
• Contributions qualifying for the gift tax annual exclusion are specifically protected under the Illinois, Nevada, New Hampshire and New York

statutes.

• Under the Delaware, Illinois, Kentucky, Missouri, Nevada, North Carolina, Ohio, South Dakota and Virginia statutes, where contributions

qualified for the gift tax annual exclusion under IRC 2503(b) based on the first trust’s qualification as a 2503(c) trust, the second trust cannot extend the age for vesting and distribution of the beneficiary’s interest beyond the age set forth in the first trust.

• Under the Arizona statute, the proposed decanting cannot adversely affect the tax treatment of the first trust, the trustee, the settlor or the
• beneficiaries. The Illinois and New York statutes similarly prohibit a decanting where it would jeopardize any tax benefit of the first trust.
• The Illinois, Kentucky, and Ohio statutes also specifically protect trusts for which sub-S elections have been made.
• The New York and Illinois statutes make it clear that grantor trust status is not a tax benefit and thus a decanting can be undertaken to

change a trust from a grantor trust to a non-grantor trust and vice versa.

STATUTORY LIMITATIONS ON EXERCISE OF TRUSTEE’S INVASION POWER

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3. Many statutes also protect property subject to a presently exercisable rights or powers of withdrawal.

• Under the New Hampshire statute, the decanting power does not apply to such property.
• Under the Missouri, Nevada and South Dakota statutes, the decanting power does not apply unless the beneficiary’s power of

withdrawal under the first trust is unchanged in the second trust.

• Under the Delaware statute, the decanting power does not apply to a presently exercisable right of withdrawal held by a person who

is the only beneficiary to or for whose benefit distributions may be made under the first trust.

• Under the Kentucky, North Carolina and Virginia statutes, the second trust must provide an identical power of withdrawal or

sufficient assets to satisfy the right of withdrawal must remain in the first trust.

• The Illinois, New York and Ohio statutes also prohibit the elimination of the current right to withdraw a specified amount or

percentage of trust principal.

• The Illinois, New York and Ohio statutes also protect a beneficiary’s right to receive mandatory principal distributions under the first

trust.

4. Many of the statutes also contain provisions prohibiting the extension of the permissible period of the rule against perpetuities applicable to the first trust.

• Attempts to extend the duration of a trust can have varying consequences depending on whether the trust is grandfathered from the

GST tax, exempt from the GST tax or non-exempt.

• Care should be taken when a trust is decanted from a state that has a rule against perpetuities to a state that has repealed the rule

against perpetuities or has a longer rule than the rule applicable to the first trust.

• Note that in Delaware, a trustee may validly decant from a first trust of limited duration to a second trust of longer duration, including

a perpetual trust. 35

STATUTORY LIMITATIONS ON EXERCISE OF TRUSTEE’S INVASION POWER

(continued)

77933058.1

Some of the decanting statutes also limit the ability of a beneficiary-trustee to decant. Concerns here include the potential for a taxable gift being made by the beneficiary-trustee or the beneficiary-trustee being deemed to hold a general power of appointment.

1.In New York, North Carolina and Virginia, a beneficiary-trustee simply is not authorized to act. North Carolina and Virginia also specifically permit the court to appoint a special fiduciary to exercise the power if all trustees are beneficiaries of the first trust. 2.In Arizona, the beneficiary-trustee cannot act if it would have an adverse tax effect on the beneficiary-trustee. 3.Where absolute discretion is required and you have a beneficiary-trustee whose action would be tantamount to a general power of appointment, they arguably cannot act (i.e., Florida, Indiana. Rhode Is). 4.Under the Nevada and New Hampshire statutes, a beneficiary-trustee cannot act : (a) if under the trust instrument or applicable law, the beneficiary-trustee cannot make or participate in discretionary distributions to himself, or is limited by an ascertainable standard, or (b) the beneficiary-trustee’s power to distribute to himself requires the consent of a co-trustee or person holding an adverse interest and the second trust does not limit distributions to the beneficiary-trustee to an ascertainable standard and is exercisable without consent. 5.Under the South Dakota statute, a restricted trustee cannot act if doing so could have the effect of (i) benefitting the restricted trustee as a beneficiary unless the exercise is limited to a HEMS standard, (ii) removing restrictions on distributions to a beneficiary of the first trust unless distributions under the second trust are limited to a HEMS standard, or (iii) increasing the distributions that can be made from the second trust to the restricted trustee or to beneficiaries who can remove and replace trustees with related or subordinate parties to the beneficiaries unless the exercise of such authority is limited by a HEMS standard. 6.In Missouri, unless the trustee’s distribution power is limited by a HEMS standard, the trustee cannot decant the assets of the first trust if (a) the trustee is a beneficiary of the first trust, or (b) any beneficiary of the first trust can remove and replace the trustee of the first trust with a related or subordinate party to such beneficiary. 7.Practitioners should also be aware of restrictions on decanting where beneficiaries of the second trust have the right to remove and replace trustees. The Missouri, Nevada, New Hampshire and South Dakota statutes require that the second trust contain an ascertainable standard for distributions where the beneficiaries have the right to remove and replace trustees with a related or non- subordinate party to the beneficiary. 8.In Nevada and New Hampshire, a beneficiary-trustee cannot decant if the first trust prohibits a trustee’s use of trust assets to discharge his support obligation unless the second trust also contains such a prohibition.

ADDITIONAL LIMITATIONS WHERE TRUSTEE IS A BENEFICIARY OR WHERE BENEFICIARIES POSSESS CERTAIN POWERS

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77933058.1

1. Manner of exercise:

• Most of the statutes, including Delaware, Florida, Illinois, Indiana, Kentucky, New York, North Carolina, Ohio, Rhode Island, South

Dakota and Virginia, require a written instrument that is signed and acknowledged by the trustee and filed with the records of the first trust (and the second trust in Illinois).

• The Alaska, Arizona, Missouri and New Hampshire statutes are all silent on the manner of exercise.

2. Can the second trust be established under the first trust or is a new trust required?

• The Alaska and South Dakota statutes specifically require that a new governing instrument be created.
• The Arizona, Delaware, Florida, Indiana, Missouri, North Carolina, Ohio and Tennessee statutes specifically authorize the trustee to

establish the second trust under the first trust.

3. Notice Requirements:

• The Florida, Indiana, North Carolina, Rhode Island and Virginia statutes all require 60 days advance notice to the beneficiaries of the

first trust.

• The Ohio statute requires 30 days advance notice to all beneficiaries of the first trust.
• The South Dakota statute requires 20 days advance notice to all beneficiaries of the first trust.
• The Illinois statute requires that 60 days advance notice be given to all legally competent current beneficiaries and presumptive

remainder beneficiaries of the first trust (all as determined on the date the notice is sent). If the trust has a current charitable beneficiary or presumptive remainder beneficiary, notice must also be sent to the Attorney General.

• The Kentucky statute requires 60 days advance notice to current beneficiaries of the first trust and to all beneficiaries in the oldest

generation of remainder beneficiaries of the first trust.

• The Missouri statute requires 60 days advance notice to all permissible distributees and qualified beneficiaries of the second trust.
• In New York, notice must be served on the beneficiaries of the first trust (interested persons) and also the trust creator, if living, and all

persons with a right to remove or replace the trustee exercising the decanting power.

• New Hampshire and Illinois require notice to the Director of Charitable Trusts/AG where the first trust has a current or future charitable

beneficiary.

• The Nevada statute authorizes but does not require notice and the Delaware statute does not require any notice.
• What constitutes notice? In New York, serving a copy of the decanting instrument plus both trust instruments. In Florida, Indiana,

Kentucky, North Carolina and Rhode Island, serving a copy of the proposed instrument exercising the decanting power is sufficient. In South Dakota, serving a copy of the decanting instrument and the second trust constitutes notice. 37

MECHANICS OF THE TRUSTEE’S EXERCISE OF THE POWER TO APPOINT IN FURTHER TRUST

77933058.1

4. Waiver of Notice:

• The Florida, Indiana, Kentucky, Nevada, North Carolina, Ohio, Rhode Island and South Dakota statutes all allow a beneficiary to

specifically waive the notice period, in which case the decanting will be effective prior to the expiration of the notice period. New York allows the beneficiaries to accelerate the effective date of the decanting, which is 30 days from the date that the serving of notice is

• complete. In Illinois, the decanting will be effective 60 days after notice is sent.
• Missouri and Virginia statutes allow the beneficiaries to waive notice itself.

5. Beneficiary Consent:

• Beneficiary consent generally is not required in any state and there are both gift and GST tax reasons for this. The exceptions are

Nevada where property specifically allocated to a beneficiary of the first trust will no longer be allocated for the beneficiary under either the first or the second trust and Ohio, where consent of the beneficiaries of the second trust or court approval is required when the second trust increases or changes the method for computing compensation of the trustee.

• Also, some statutes, such as Florida, Indiana, North Carolina, Nevada, New York, Ohio, Rhode Island and Virginia, make it clear that

a trustee’s giving notice and/or a beneficiary’s waiver of the notice period do not limit a beneficiary’s right to object.

6. Court Approval and Court Filing Requirements:

• Only Ohio requires court approval and only in cases where the first trust is a testamentary trust created by an Ohio domiciliary.
• New York has a court filing requirement for testamentary trusts and inter vivos trusts that were the subject of prior court proceeding

(but court approval is not required).

• Some statutes, such as those in Arizona, Illinois, Kentucky, Nevada, New York and North Carolina, make it clear that the trustee can

petition for a court approval.

• The Alaska statute specifically provides that the trustee can act without court approval.

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MECHANICS OF THE TRUSTEE’S EXERCISE OF THE POWER TO APPOINT IN FURTHER TRUST

(continued)

77933058.1

1. In Alaska, Delaware, Nevada and Ohio, the second trust can provide that it will be administered on terms substantially identical to the terms of the first trust after the passage of time or the occurrence of an event specified in the second trust. 2. The New York and Illinois statutes specifically permit the term of the first trust to be extended in the second trust. The ability to extend the duration of the first trust under the second trust is implied under the Ohio statute. 3. Some decanting statutes, such as those in Illinois, New York and Ohio, also provide that the decanting cannot change the commissions of the trustee under the second trust and prohibit a trustee from decanting a trust in order to reduce the trustee’s standard of care or to exonerate or indemnify the trustee from liability under the second trust. 4. Virtually all of the decanting statutes specifically provide that spendthrift clauses and provisions prohibiting amendment or revocation of the first trust do not bar a decanting (See Florida, Indiana, Illinois, Kentucky, Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, Rhode Island, South Dakota, and Virginia). 5. The more modern decanting statutes also provide that a trustee does not have a duty to decant and most also provide that the trustee’s failure to decant does not give rise to an inference of impropriety (See Florida, Indiana, Illinois, Kentucky, Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, Rhode Island and Virginia). 6. Many decanting statutes also make it clear that the statute does not abridge other rights of the trustee to appoint trust assets, whether under the trust instrument itself, or under state law or common law (See Delaware, Florida, Illinois, Indiana, Kentucky, Nevada, New York, North Carolina, Ohio and Virginia). 7. Some decanting statutes, such as those in Delaware, Missouri, New Hampshire, New York, Ohio, South Dakota and Virginia, contain statements that a decanting is subject to all of the trustee’s fiduciary duties and standards as they would apply in making a discretionary outright distribution, and some statutes set forth guidelines that the trustee must consider before exercising a decanting power (such as the purposes of the trust as intended by the grantor, whether the decanting is in the best interests of all trust beneficiaries, whether the distribution is being made in good faith and the potential tax consequences of the decanting).

ADDITIONAL STATUTORY PROVISIONS

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77933058.1

ADDITIONAL STATUTORY PROVISIONS

(Continued)

8. All of the statutes apply to both testamentary and irrevocable inter vivos trusts that are governed by the laws of that state, and most of the statutes also make it clear that the statute will apply to a trust whose jurisdiction has been transferred to that state. 9. Some of the statutes, such as Delaware and Ohio, specifically apply to trusts administered under the laws of that state, even if the trust is governed by the law of another state. Under the Alaska and New York statutes, if the trust has a resident trustee and the other trustees elect to have the primary administration of the trust located in that state, their decanting statutes will apply (even if the trust is not governed by that state’s law). 10. The New York and Illinois statutes make it clear that a distribution of all of the assets of the first trust includes subsequently discovered assets of the first trust, whereas if only a part of the assets of the first trust are distributed, then subsequently discovered assets will continue to belong to the first trust. 11. The Illinois, New York and Virginia statutes specifically allow the trustee of the first trust to decant to a second trust that is a supplemental needs or special needs trust. 12. Some of the decanting statutes do not apply to specific types of trusts. Examples:

• The Rhode Island statute does not apply to supplemental needs or special needs trusts
• The Kentucky statute does not apply to charitable remainder trusts

40

Strafford Publications Webinar October 2, 2012 TRUST DECANTING: FLEXIBILITY AND DANGER COMMON PITFALLS

Thomas R. Pulsifer Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market Street P.O. Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 351-9226 Facsimile: (302) 425-4682 tpulsifer@mnat.com www.mnat.com

41

Trust Decanting: Flexibility and Danger Common Pitfalls

• I.

Introduction

A. At least seventeen states permit decanting by statute (Alaska; Arizona; Delaware; Florida; Illinois; Indiana; Kentucky; Missouri; Nevada; New Hampshire; New York; North Carolina; Ohio; Rhode Island; South Dakota; Tennessee; and Virginia) B. Superficial similarities in the statutes disguise important and sometimes subtle differences C. Rules regarding availability; circumstances in which decanting is permitted; permissible terms of recipient trust; formal requisites

• f decanting; and many other aspects of the decanting

transaction vary from State to State D. The statutes offer many valuable options and opportunities but inevitably entail significant risks E. “Forewarned is forearmed”

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• II. Conflicts of Law; Availability of the Statue

A. The proper conflicts of law analysis applicable to statutory decanting transactions is sufficiently novel so as to be unclear in its detail B. Typical fact patterns create many superficial issues amenable to easy resolution 1. Trusts governed in part by the laws of multiple jurisdictions 2. Trusts have co-fiduciaries in multiple jurisdictions C. Some outlier cases may create true traps for the unwary 1. Administration governed by laws other than the laws of the trust’s situs 2. Trusts having no clear situs D. Proper analysis probably follows Wilmington Trust Company v. Wilmington Trust Company, 26 Del. C. 397, 1942) but this is not necessarily so. See 12 Del. C. § 3528(f); compare AS 13.36.157; A.R.S. 14-10819(B) E. Could following a statute break the law?

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• III. Statutory Requisites; Conditions; Limitations
• A. Identifying the nature of the trustee’s principal

distribution power; absolute discretion v. ascertainable standard

• B. Statutory safeguards; express and implied limitations
• C. Compliance with ascertainable standard
• D. Adding beneficiaries; reordering or altering beneficial

interests of non-current beneficiaries

• E. Reduction in fixed income interest and other

anomalies

• F. Cures: Releases and virtual representation
• G. Perhaps incurable powers deficiency problem

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• IV. Trustee Liability and Participation
• A. Issues encountered in obtaining trustee acquiescence

to a proposed decanting

• B. Protecting the trustee from liability
• C. Law governing releases and consents; virtual

representation; fiduciary liability and standard of care

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• V. Mechanical Issues
• A. Filing requirements
• B. Notice requirements
• C. Other statutory formalities

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• VI. Generation-Skipping Transfer Tax

Considerations

• A. Treasury Reg. § 26.2601-1(b)(4)(i)(D)
• 1. Modification v. exercise of a power
• B. Grandfathered trusts v. other exempt trusts

47

Strafford Publications Webinar October 2, 2012 TRUST DECANTING: FLEXIBILITY AND DANGER STRATEGIES

Todd A. Flubacher Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market Street P.O. Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 351-9374 Facsimile: (302) 425-4682 tflubacher@mnat.com www.mnat.com

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STRATEGY OVERVIEW

1. Evaluate the trustee’s power to decant

– What state law governs? – Does the trustee have the power to decant under the instrument or applicable law – Must/can the trust be moved to a new jurisdiction that permits decanting?

• How do you move the trust?
• How do you change applicable law?

2. Evaluate trustee’s duties in connection with decanting 3. Address trustee’s risk

– Can you mitigate trustee risk with releases? – Can you bind all of the beneficiaries with releases?

• Virtual representation

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STRATEGY OVERVIEW (Continued)

• 4. Implementation

– Requirements under applicable statute – Entirely new trust agreement – Simple decanting instrument – Releases

• 5. Plan ahead

– Facilitate decanting under new instruments with express provisions

• Expressly authorize decanting
• Limitations on decanting liability
• 6. Tax Issues

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BEFORE DECANTING, THERE ARE TWO TRESHHOLD ISSUES

• First, you must determine whether the trustee has the power to decant.

– If the trustee doesn’t have the power to decant under the specific circumstances, then decanting is simply not possible.

• Second, the decanting must be consistent with the trustee’s applicable

fiduciary duties for making a distribution.

– The issue of whether decanting is consistent with fiduciary duties can often be

• vercome be releases and/or consents from the beneficiaries.

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DOES THE TRUSTEE HAVE THE POWER TO DECANT?

• First, you must determine whether the trustee has the power to decant.

– Does the trustee have the express power under the governing instrument to decant? – Does the law governing the trust have an applicable decanting statute? – If the applicable law does not permit decanting, can the trust be moved to a state that does permit decanting?

• What must you do to move the trust?
• What must you do to change the applicable law?
• Can you find a trustee that is willing to decant?

– Is it possible to decant from the current trust to a new trust with the desired terms under the applicable statute and the trust instrument?

• Does the trustee have the power to distribute principal?
• Does the applicable statute or governing instrument provision allow the changes to be

accomplished by decanting?

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EVALUATING THE TRUSTEE’S POWER TO DECANT

• The trustee generally must have the power to distribute principal to one or more

beneficiaries.

• Does the trustee make distributions with the direction or consent of another?
• Assuming the trustee has the power to distribute all of the principal of the trust, one

must then compare the original instrument to the new instrument, identify the differences, and assess whether the proposed changes are permissible under the applicable statute.

– It is generally advisable to get local counsel to make this assessment under applicable law.

• Administrative Changes: Typically, administrative provisions can be modified in almost

any way that is desired.

– If the only differences between the original instrument and the new instrument are administrative in nature, and the beneficial interests will remain the same, then the analysis is generally quite simple.

• Changing Beneficial Interests: However, if the decanting alters the beneficiaries’

interests, then close scrutiny is necessary to ensure that the new instrument does not run afoul of the applicable statute.

– Generally, you cannot add beneficiaries or change or eliminate the interests of beneficiaries who are currently not proper objects of an exercise of the power to distribute principal. – Different statutes may also have other specific limitations (such as the inability to change the income interest under a marital trust or change the vesting of an interest under a 2503(c) trust).

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WHAT ARE THE TRUSTEE’S FIDUCIARY DUTIES?

• Second, the decanting must be consistent with the trustee’s applicable

fiduciary duties for making a distribution.

• When a trustee decants, it is making a distribution of the trust assets.
• In exercising its discretion, the trustee must uphold its duties of

impartiality, care and loyalty to all of the trust beneficiaries. Are the changes to be made by the decanting consistent with those duties?

• If there is a standard for making principal distributions, such as an

ascertainable standard, the decanting must comply with the standard.

• Where a trustee has the power to invade the principal of a trust for a

beneficiary that is subject to a standard, the trustee owes the other beneficiaries of the trust the duty of care to make some investigation to learn whether the condition precedent to the right to the principal exists and justifies the distribution.

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WHAT LAW APPLIES?

• Many statutes provide that the decanting shall be viewed as an exercise of

a power of appointment. Under Delaware law, the validity of the exercise

• f a power of appointment is governed by the laws of the jurisdiction in

which the trust is administered. The Delaware decanting statute provides that the statute shall apply to any trust administered in Delaware.

• However, other states may have a different conflicts of laws approach to

the applicability of a decanting statute.

• The issues of situs, governing law and place of administration can become

complicated, particularly if a trust is being moved to a jurisdiction in order to utilize a decanting statute.

• If these issues are not addressed, there can be risk that the decanting was

not proper, or that the trustee cannot effectively obtain releases.

– It may be necessary to get legal counsel in one or more jurisdictions to address these multi-jurisdictional issues.

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TRUSTEE LIABILITY CONCERNS

• A trustee will generally be concerned about the potential liability for breach of

fiduciary duties associated with its exercise of discretion to appoint the trust assets to the new trust, unless the reasons for the decanting are so ministerial and innocuous that it poses little or no risk to the trustee.

• The risk could be limited, or eliminated, if all of the beneficiaries consent to

the decanting and release the trustee for all liability in connection with it.

• Of course, it is not always the case that all of the beneficiaries are living adults

and there are often contingent remainder beneficiaries who might potentially complain in the future.

• Fortunately, many jurisdictions, like Delaware, have virtual representation

statutes that can effectively bind all present and future beneficiaries of the trust if all of the adult beneficiaries release the trustee, and there is no conflict

• f interest between those beneficiaries and the parties represented (this is

more easily accomplished when the changes caused by the decanting are administrative in nature and are not changes to beneficial interests).

• HOWEVER – What law governs the releases and virtual representation?

56

TRUSTEE LIABILITY CONCERNS TWO LINES OF DEFENSE

• A trustee should have two lines of defense in connection with a decanting,

if the trustee has the power to make principal distributions in its discretion.

• First, the trustee can get release and indemnification agreements from the

beneficiaries with virtual representation binding the minors and unborns.

• Second, even if there is some issue with the release and indemnification,

the trustee’s actions will be judged under the abuse of discretion

• standard. This provides that the trustee’s exercise of discretion will only

be overturned if it’s actions were arbitrary or capricious, not merely unreasonable.

57

STANDARD OF REVIEW FOR TRUSTEE’S EXERCISE OF DISCRETION

• If the trustee has discretion to make distributions under the
• riginal instrument, then the decision to make the

distribution would typically be reviewed by a court under an abuse of discretion standard.

• The trustee should process the decision through its usual

procedures for making a discretionary distribution.

– The trustee should make the decision through its discretionary distribution committee. – The trustee should investigate the facts and circumstances. – It may be advisable to get advice from legal counsel. – The process should be documented.

58

DECANTING CAN BE VIEWED AS BOTH A TERMINATION OF THE OLD TRUST AND A REMOVAL OF THE TRUSTEE

DECANTING AS A TERMINATION OF THE OLD TRUST

• When a trust is decanted, the assets of the first trust flow over into the second trust, and the

first trust is terminated. Not only will the trustee typically seek releases in connection with its exercise of discretion to decant, but it will likely seek releases and an accounting, and any

• ther typical procedure that a trustee in its particular jurisdiction will seek when a trust is

terminated and its service as trustee ends. DECANTING AS A REMOVAL OF THE TRUSTEE

• Since the assets have been transferred to a new trust, which may or may not have the same

trustee as the original trust, a decanting can also be viewed from the trustee’s perspective as a removal of the trustee of the first trust and an appointment of a successor trustee. Consequently, it is advisable to include an indemnification provision in the new, second trust instrument that runs to the trustee of the original trust, even if the individual or corporate identity of the trustee is the same for both trusts (such individual or entity will still be serving in two different capacities).

• Thus, the outgoing trustee knows that if claims, taxes, fees, liabilities, etc. from the original

trust arise in the future, which would have been properly payable from the trust, the trustee

• f the original, now defunct trust can still have some recourse against the new trust to be

reimbursed.

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IMPLEMENTATION

• Some statutes may permit or require the trustee to provide notice to

beneficiaries or file a notice with the court.

• Generally, a decanting requires a written instrument, signed by the trustee

and notarized.

• Simple Decanting Instrument: Depending upon the number of changes,

you might simply draft a simple decanting instrument that provides that the new trust shall be held in accordance with all of the terms and conditions of the original trust subject to some enumerated changes and additions.

• New Trust Agreement: Alternatively, you might draft an entirely new trust

agreement and also draft a decanting instrument that memorializes the trustee’s exercise of its power to decant the assets of the original trust to the new trust.

– The new trust could be a declaration of trust, or have the trustee of the original trust as the grantor, or it could have some other person as the grantor.

• Trustee Release, indemnification and approval of account.

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PLANNING AHEAD FOR DECANTING

• By far, the biggest hurdle in accomplishing a decanting is the trustee’s

reluctance to take on the risk associated with the exercise of discretion.

• When drafting new trust agreements, it is advisable to draft enabling

provisions in the agreements which limit a trustee’s liability and provides indemnification in connection with a decanting.

• This kind of advanced planning might provide the flexibility and protection

for a trustee to enable the trustee to perform a decanting in the future, if it is desired by the beneficiaries, without the delay and expense of releases, accountings, indemnifications, etc.

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