Private Client Services Update – Decanting: A New Tool in the Trustee’s Arsenal

    By Robert H. Powell III, Estate, Trust & Wealth Transfer

    Effective July 1, 2012, the Virginia General Assembly will be providing trustees of irrevocable trusts a valuable new tool. With the addition of §55-548.16.1 to the Code, Virginia joins a growing number of states (at least 10) with what is generally referred to as “decanting” statutes.

    Where an irrevocable trust provides the trustee the discretionary power to distribute principal or income to or for the benefit of one or more current beneficiaries, decanting gives the trustee the special power to appoint assets in the “original trust” into a “second trust.” With decanting, instead of exercising the power of invasion by making a distribution directly to a beneficiary, the trustee will be able to distribute the assets into a second trust for one or more beneficiaries of the original trust.

    This new power could prove invaluable in some of the following situations:

    1. Where the original trust has outdated administrative provisions, updated provisions could be incorporated into the second trust.
    2. Where the situs of the original trust does not have beneficial tax laws, the second trust can change the trust’s situs to another jurisdiction.
    3. The second trust could add a trust protector or trust advisor.
    4. Where a beneficiary in the original trust has become disabled and has special needs, assets could be transferred into a second trust for that beneficiary with the second trust qualifying as a special needs trust.
    5. The second trust could have a different trustee.
    6. The second trust could correct drafting errors in the original trust.

    In short, decanting gives a trustee the power to amend or modify an irrevocable trust without authorization of the court.

    There are some limitations and procedural requirements that must be followed. For example, the second trust may not add beneficiaries who were not beneficiaries of the original trust. Beneficiaries may be deleted, however. If the original trust limits distributions by an ascertainable standard, then the second trust must have similar limitations. There is an exception, however, for special needs trusts. Also, a beneficiary whose interest in the original trust is only a future beneficial interest may not have that interest accelerated to a present interest in the second trust. If the original trust provides any fixed income, annuity, or unitrust benefits for a beneficiary, the second trust may not reduce those benefits. The statute contains provisions designed to preserve marital and charitable deductions as well as a beneficiary’s right of withdrawal that was provided for in the original trust. The trustee exercises the power to decant by a written instrument that is signed and acknowledged by the trustee. The document must set out the manner in which the power is being exercised, the terms of the second trust, and the effective date of the exercise of the power. The trustee of the original trust must give this written notice to the grantor of the original trust, to all qualified beneficiaries as determined under the Uniform Trust Code (other than the Attorney General), and to any trust protector or advisor of the original trust. These individuals may waive the notice requirements. Also, if the original trust was required to file reports with the Commissioner of Accounts, the second trust must do likewise.

    The new section does offer protection to trustees by providing that the section is not to be construed as creating or implying any duty on the trustee to act under the section and further provides that there is no inference of impropriety where the trustee does not act under the statute.

    The statute does provide that a trustee or beneficiary may bring an action to seek approval or disapproval of the trustee’s planned decanting. The section provides that it applies to trusts regardless of the date the trust was created unless the trust expressly prohibits the exercise of the decanting power. Thus, for those creating a trust or those who have a trust in existence and who want to prevent a trustee’s decanting in the future, language similar to the following should be included in the trust: “My trustee shall not have the power to appoint income or principal of this trust to another trust.”

    For the trustee who is administering a trust with outdated provisions or where there are changed circumstances, the new decanting statute will provide an opportunity to transfer assets to a second trust that has more favorable provisions. This can definitely aid the trustee in the management and administration of the trust.

    Robert H. Powell, III is of counsel in the firm’s Norfolk office where his practice focuses on trust and estate planning, real estate, and corporate transactions. He received his B.S. and LL.B., cum laude, from Washington & Lee University. Bob is AV® rated by Martindale Hubbell and has been designated an Accredited Estate Planner by the National Association of Estate Planning Councils. Bob is also a member of the Legislative Committee of Wills, Trusts and Estates Section of the Virginia Bar Association. Active in the community, Bob’s current civic involvement includes service on the Hampton Roads Estate Planning Council, Rotary Club of Norfolk, Bank of Hampton Roads, and Foundry United Methodist Church.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.