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Tips From the Pros: Decanting Dilemmas

Charles A. Redd reports that although decanting has its benefits, a few recent cases show otherwise.

As readers of Trusts & Estates know well, decanting is the process by which a trustee, exercising a discretionary distribution power, distributes assets to another trust for the benefit of the beneficiary in favor of whom the power is ostensibly exercised, and perhaps one or more others, rather than directly to such beneficiary. Decanting appears to have originated under common law in a 1940 Florida Supreme Court case,1 but its popularity and frequency of use didn’t emerge until states began to enact statutes explicitly authorizing decanting.2 Today, 24 states3 have decanting statutes, and at least one state lacking such a statute, Massachusetts, allows decanting pursuant to case law.4

Decanting is one of several techniques that have developed in modern trust law to enable changes to be made to irrevocable trusts whose terms have become inappropriate for current circumstances, detrimental or difficult or impossible to implement. Depending on the state whose law governs administration, the new trust, as compared to the trust out of which the distribution was made, may have different standards for distribution, permit or direct distributions at a different time or times, create a new power of appointment and include different beneficiaries. Whether decanting is good or bad depends on the facts of the particular case and the perspective of the person opining.5

The benefits of decanting notwithstanding, a couple of recent cases illustrate that decanting may not always deliver the expected end results.

Ferri

In Ferri v. Powell-Ferri,6 the husband (Paul) was the beneficiary of a trust created in 1983 by his father in Massachusetts. Paul and his wife, Nancy, resided in Connecticut. Nancy initiated divorce proceedings in 2010. At that time, Paul could withdraw 75 percent of the trust property, and, while the dissolution proceedings were underway, Paul became entitled to withdraw 100 percent of the trust property. Except to the extent Paul exercised his withdrawal rights, disposition of trust property was subject to the trustees’ very broad discretion. The trustees, concerned Nancy could successfully make a claim to trust assets in the divorce action, decanted the trust to a new, spendthrift trust under which Paul’s beneficial interest was completely subject to the trustees’ discretion. Paul didn’t approve or consent to the decanting and in fact had no knowledge of it whatsoever until after it had been accomplished. The trustees sought a declaratory judgment that the decanting was valid. Nancy argued the decanting was invalid and that, even if the decanting were valid, she could reach the trust property because the new trust was, in substance, a self-settled trust.7

The Supreme Court of Connecticut, relying on an advisory opinion it had received from the Supreme Judicial Court of Massachusetts,8 held the decanting was valid under Massachusetts law9 and that the new trust wasn’t, legally or in substance, a self-settled trust, despite Paul’s withdrawal rights. In the related dissolution case, Powell-Ferri v. Ferri,10 however, the Supreme Court held that, although the assets of the new trust weren’t subject to division as marital property, having effectively lost their status as marital property in the valid decanting transaction, the trial court could properly consider the new trust and Paul’s beneficial interest in that trust when decreeing an appropriate annual alimony amount to be paid by Paul. On considering the new trust, the trial court ordered that Paul must pay $300,000, annually, in alimony even though, at the time the divorce proceeding began, Paul’s annual earnings totaled $200,000. Perhaps the divorce court thought its alimony order would give Nancy an indirect path by which to gain access to some of the decanted trust’s assets.

The decanting, standing alone, obviously was successful. In fact, it could be characterized as extraordinarily successful because the court sanctioned a decanting that eliminated a presently and unilaterally exercisable power of withdrawal.11 The result in the divorce case, however, which must have been a nasty surprise to Paul, substantially compromised the effect of the decanting. Paul became the beneficiary of a wholly discretionary trust, from which he may or may not ever receive any distributions, and is subject to a court order compelling him to pay alimony in an amount 50 percent higher than his annual non-trust income.

Hodges

In Hodges v. Johnson,12 the “decanting trustee” of two irrevocable trusts engaged in three separate decanting transactions over a 3-year period. The net result of these decantings was that, among six original current beneficiaries, four were eliminated as such, and, among five original first-line contingent remainder beneficiaries, three were eliminated as such. Under applicable state law (the law of New Hampshire), a trustee is allowed to decant from one irrevocable trust (the first trust) to another (the second trust) “for the benefit of one or more” of the beneficiaries of the first trust.13 However, the Supreme Court of New Hampshire, affirming the trial court, held that the decantings were improper and void because the decanting trustee violated his duty of impartiality by failing to give any consideration to the plaintiffs’ future beneficial interests. The trial court had indicated discomfort with the settlor’s initiation of the decantings and “the deeply personal and harsh nature of the decantings.” The Supreme Court quoted and seemed impressed by a statement by respected commentators in a professional journal that, while a trustee may decant in a manner that eliminates the beneficial interest of a given beneficiary, “it is difficult to imagine the factual scenario where the trustee would not violate its fiduciary duty of impartiality owed to that beneficiary.”

The decanting trustee, in implementing the decantings, obviously favored one group of beneficiaries over the other. In the world of discretionary trusts having multiple concurrent beneficiaries, trustees do that all the time. The very nature of such trusts is that some beneficiaries inevitably receive more than others—sometimes to the exclusion of others. As long as the trustee exercises his discretion honestly, in good faith and consistent with the governing instrument and applicable trust law, there’s nothing insidious in particular beneficiaries of a discretionary trust receiving smaller distributions than others or no distributions at all. The operative decanting statute in Hodges appears expressly to contemplate such a result.14

So, what went wrong? First, it seems the Supreme Court, on reading the trial court’s opinion, believed the settlor had acted as the decanting trustee’s puppet master and was mightily offended at the vitriol that motivated the settlor. Second, among the facts adduced at trial was that the decanting trustee agreed he “never gave [the plaintiffs’] financial interest any consideration.” If this weren’t a fact, that is, if the decanting trustee had given the excluded beneficiaries’ financial interests honest consideration and, after having done so, sincerely concluded that the decantings were consistent with fulfillment of his fiduciary duties under the governing instruments and applicable trust law, perhaps the result in Hodges would have been different.15

Surely, it can’t be the law that any decanting that negatively impacts a beneficial interest is per se a breach of fiduciary duty. If a given decanting can pass muster under fiduciary law pertaining to discretionary distributions, the fact that the distribution was made to another trust, rather than to one or more individuals outright, should make no difference.16  

Endnotes

1. Phipps v. Palm Beach Trust Company, 196 So. 299 (Fla. 1940).

2. New York enacted the nation’s first decanting statute in 1992.

3. Alaska, Arizona, Delaware, Florida, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Mexico, New York, North Carolina, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Wisconsin and Wyoming.

4. Morse v. Kraft, 992 N.E.2d 1021 (Mass. 2013).

5. See Charles A. Redd, “Flexibility vs. Certainty—Has the Pendulum Swung Too Far?” Trusts & Estates (March 2015), at p. 10.

6. Ferri v. Powell-Ferri, 326 Conn. 438 (2017).

7. Neither Massachusetts nor Connecticut is a self-settled asset protection trust state.

8. Ferri v. Powell-Ferri, 72 N.E.3d 541 (Mass. 2017).

9. See Morse v. Kraft, 992 N.E.2d 1021 (Mass. 2013).

10. Powell-Ferri v. Ferri, 326 Conn. 457 (2017).

11. It’s reasonable to surmise that, had Paul consented to the decanting or even known about it before it had been consummated, the Supreme Court might well have reached a different result.

12. Hodges v. Johnson, 2017 N.H. LEXIS 232 (N.H. Dec. 12, 2017).

13. RSA 564-B:4-418(a) (Supp. 2008) (amended 2014).

14. See RSA 564-B:4-418(a) (Supp. 2008) (amended 2014); see also 12 Del. Code Section 3528(a) and Section 456.4-419.2(1), RSMo.

15. Indeed, the Supreme Court stated that a decanting that “eliminates a beneficiary’s non-vested interest in an irrevocable trust” is a breach of duty “only when the trustee fails to treat the beneficiaries equitably in light of the purposes and terms of the trust.” (Emphasis added.)

16. See, e.g., 12 Del. Code Section 3528(e).

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