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Decanting From Irrevocable Trusts

New York is about to join the list of states with advantageous statutes that provide more flexibility

New York has moved back into the forefront of states with advantageous statutes allowing decanting from irrevocable trusts, with its new bill for an improved decanting statute. The bill liberalizes New York’s current statute (Estates, Powers and Trusts Law (EPTL) Section 10-6.6). New York was the first state to allow the effective “rewriting” of an irrevocable trust by permitting trust assets to be “appointed” or “decanted” to another trust when it enacted EPTL Section 10-6.6 in 1992. A number of states have followed suit, some with more flexible statutes than New York’s original statute (for example, Delaware, New Hampshire, South Dakota and Tennessee). The New York legislature has now modernized and expanded New York’s statute to allow decanting under a broader range of circumstances. The bill has passed the New York assembly and senate, and Governor Andrew Cuomo is expected to sign it into law shortly. The ability to change the terms of an irrevocable trust by decanting into a new trust is enormously useful as it allows trustees to take into account changed circumstances, to correct mistakes and to take advantage of certain beneficial tax planning. New York will have substantially improved its statute.

The original EPTL Section 10-6.6 allowed a trustee to “exercise a power of appointment” from one trust to another only if the trustee had absolute discretion to invade the trust principal for the benefit of one or more proper objects of the exercise of the power (that is, beneficiaries of the original trust). The bill eliminates this requirement and expands the use of decanting in other ways as well.

Significant Changes
Here’s a summary of the most significant changes. The bill:

  • permits a trustee to appoint the principal of the original trust to a new trust regardless of whether the trustee has absolute discretion to invade the trust principal.
  • clarifies the operation of the statute if the original trust has multiple beneficiaries.
  • allows the new trust to have a longer term than that of the original trust.
  • prescribes the requisite standard of fiduciary duty.
  • eliminates the requirement that the trustee of an inter vivos trust file the instrument exercising the power to appoint with the clerk of the court with jurisdiction over the trust, provided there has been no Surrogate’s Court proceeding relating to the trust.
  • clarifies that the exercise of the power to invade the principal isn’t foreclosed if the original trust includes a spendthrift clause or a provision prohibiting amendment or revocation of the trust.

Invasion of Trust Principal
The original trust is no longer required to have a provision granting unlimited discretion to invade trust principal. The bill permits a trustee to appoint the principal of an existing irrevocable trust to a new trust as long as the trustee has the power to invade principal for any purpose. However, if the trustee doesn’t have unlimited discretion, the new trust must have the exact same beneficiaries as the original trust. In addition, the new trust then also must contain the same provisions as to the trustee’s ability to invade principal. If the new trust’s term has been extended beyond the term of the original trust, the trustee may exercise absolute discretion during the portion of the term beyond the original term.

If the trustee has unlimited discretion to invade the principal of the original trust, the new trust can exclude some of the current or remainder beneficiaries of the original trust.

Extension of Original Trust Term
The trust into which the trustee decants may have a longer term than the original trust, which may include a term measured by the lifetime of a current trust beneficiary.

Power of Appointment
As long as the original trust grants a trustee unlimited discretion as to invasion of principal, the bill allows decanting to a new trust that grants a power of appointment (either presently exercisable or exercisable in the future) to one or more of the beneficiaries of the original trust, as long as that beneficiary was eligible to receive outright distributions from the original trust. The granting of the power of appointment may assist in effective tax planning—in particular, it may allow the postponement or avoidance of the imposition of a generation-skipping transfer tax.

Fiduciary Duty Imposed
The trustee must exercise a fiduciary duty to decant, taking into account the best interests of one or more proper objects of the exercise of the power to decant and acting as a prudent person would under the prevailing circumstances. Thus, if there’s substantial evidence of contrary intent of the grantor of the original trust and it can’t be established that the grantor would likely have changed such intention, then the trustee shouldn’t exercise the power. The provisions of the original trust aren’t, however, in and of themselves to be viewed as substantial evidence of a contrary intent of the grantor, unless the original trust expressly prohibits the action contemplated by the trustee.
Conversely, the bill provides that the existence of the statute allowing decanting shouldn’t be read to create a duty to decant, and no inference of wrongdoing will be made from a failure to decant.

Notice Requirements
The bill requires the trustee to exercise the power to decant in a signed and acknowledged writing provided to all those parties interested in the original trust, which includes the grantor and any individual with the power to remove the trustee. The trustee must include copies of the original and new trust.

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