Planning for Life

Decanting: When is a Trust Like a Bottle of Wine? - Massachusetts

Posted by Harry S. Margolis on May 7, 2013

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By Harry S. Margolis

What do you do when a trust is not working the way it should? It might have been badly drafted or circumstances or laws may have have changed in ways that could not have been anticipated at the time the trust was drafted. The result can be significant tax costs, ineligibility for important public benefits, or conflict among beneficiaries or between beneficiaries and trustees.

There are a number of potential solutions to these problems, each of which may be more or less advisable depending on the circumstances.  These include:

  • Living with the situation.

  • Changing trustees.

  • Ending the trust by distributing the trust funds out to beneficiaries.

  • Seeking court approval to modify the trust.

  • In some trusts, asking the "trust protector" to modify the trust.

  • Decanting.

Connoisseurs of wine decant old bottles by pouring the wine into special pitchers to separate out sediments and to let the wine breathe. The term decanting also has been applied to transferring assets from one trust to a new one that serves the same beneficiaries and purpose, but corrects whatever was wrong with the old document, in other words getting rid of the sediments and offering the trust new life.

Decanting may be permitted by statute, by the terms of the original trust or by court-created law. Massachusetts has no specific law on whether decanting is permissible where not authorized in the old trust and the Kraft family of New England Patriots fame has now brought an action, Richard Morse, Trustee v. Jonathan A. Kraft, et al., before the Massachusetts Supreme Judicial Court asking that it permit this practice.

In a 64-page amicus brief which you can read by clicking here, the Boston Bar Association is supporting the Kraft family and the concept of decanting. It describes the question before the court as follows:

Does a trustee have the power to make distributions in further trust for any beneficiary's benefit without the consent or approval of any beneficiary or court?

It argues "that a trustee's broad discretion to distribute property outright to a beneficiary includes the authority to distribute property to a new trust for the benefit of the same beneficiary, subject to fiduciary limitations based upon the nature and purposes of the trust and the beneficiary's best interests."

In other words, the Kraft family and the Boston Bar Association both believe that it should be fine to transfer assets from one trust to another as long as the new trust serves the same purposes as the original trust, and to be able to do so without court approval.

Some trusts are written to give trustees authority to do so already.  But that is unusual. In our own practice, we have counseled clients to "decant" even where not specifically authorized where all of the beneficiaries have clear notice and have agreed to the change. Sometimes, however, it is impossible to ascertain all of the beneficiaries.  For instance, a parent may set up a trust for her children, to distribute to grandchildren and great grandchildren upon the death of her last surviving child.  It would be impossible today to know what grandchildren and great grandchildren will be living when the last surviving child passes away, which may occur decades in the future.

Of course, we are always dealing with much smaller trusts than the Kraft family. And for tax or other reasons, the new trust may be better for all beneficiaries than the existing trust. In such cases, we may advise the trustee to transfer all of the assets of the existing trust to the new trust even if we cannot ascertain or contact all of the potential beneficiaries.

To stretch a metaphor, like old wine in a new carafe, old trust assets in a new trust intrument may taste much better to all.

Topics: Estate Planning

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