August 26, 2013
Authored by: William Linkous, Jr. and Tiffany McKenzie
What does a trustee do when an irrevocable trust needs to be modified? Circumstances or laws may have changed in ways that could not have been anticipated at the time the trust was drafted. In the past, a trustee who wanted to change some aspect of an irrevocable trust had few options, other than a court order to reform the trust which can be a costly and lengthy process. Now, many states have alleviated the necessity of court approval to modify trusts by permitting “decanting.” (For an example of such a statute, see our prior post, “How is an Illinois Trust Now Like a Fine Wine? It Can Be Decanted: A Summary of the New Illinois Decanting Statute”.)
Decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries. Decanting may be permitted by statute, by the terms of the original trust or by court-created law. Currently, Massachusetts has no specific decanting statute. However, in Morse v. Kraft, 466 Mass. 92 (2013), the Massachusetts Supreme Court authorized the trustee of the Kraft family trusts to decant the trust without the consent or approval of the court or any beneficiary.
In 1982, Robert and Myra Kraft (the Krafts) established the 1982 Trust, and four separate subtrusts therein, for their four sons. Each son was the income beneficiary of his respective subtrust. The 1982 Trust permits only disinterested trustees. The trust was drafted to preclude the sons from serving as disinterested trustees because, at the time of the trust’s creation, the sons were minors and it was impossible to know whether they would develop the skills and judgment necessary to make distribution decisions concerning their own respective substrusts.
Since the creation of the trust, the Plaintiff, Richard Morse (“Morse”), served as the sole and disinterested trustee of the 1982 Trust and the four separate subtrusts. In 2012, Morse was eighty-one years old and nearing retirement. He proposed to transfer all of the property of the subtrusts into new subtrusts established in accordance with the terms of a new master trust for the benefit of the Kraft sons. Morse believed that the transfer of assets to the new subtrusts would be in the best interests of the 1982 Trust beneficiaries from a management perspective because each of the Kraft sons was in his forties and was qualified to manage the assets of the subtrust. Morse asked the Massachusetts Supreme Court to interpret the 1982 Trust to determine whether it authorized distributions to the new trust without the consent or approval of any beneficiary or court.
The Supreme Court stated that a trustee’s decanting authority “turn[s] on the facts of the particular case and the terms of instrument creating the trust.” The Court concluded that because the trust granted Morse the unlimited discretion to make an outright distribution to and for the benefit of the beneficiaries, so too did it authorize a distribution in further trust. The Court regarded the broad grant of almost unlimited discretion as evidence of the settlor’s intent that the disinterested trustee could have the authority to decant the assets in further trust(s).
This Massachusetts Supreme Court decision made it clear that the trust agreement remains king. If the terms of the instrument allow for decanting, a trustee can distribute trust assets to a further trust for the benefit of the beneficiaries of the original trust without their consent, court approval or statutory law authorizing decanting.
Caveats: Reliance on this case should be tempered by a consideration of the following facts:
1. Apparently, the new 2012 Trust contemplated no alterations in the dispositive or administrative provisions of the 1982 Trust and subtrusts. The only change noted by the Court is that in the new trust “the sons can serve as trustees with distributive powers over their respective subtrusts.” Whether a court would, without beneficiaries’ approval or statutory guidance, authorize decanting to a new trust containing alterations in, for instance, the remote or contingent beneficiaries or the investment powers of the trustee, is at least doubtful.
2. Although the Court looked to the terms of the trust in finding that it was the intent of the settlor to allow the decanting without the consent of the beneficiaries, the Court no doubt took some comfort in the affidavits filed by the settlor, the principal draftsman, and the “plaintiff disinterested trustee” testifying to this intent.
3. The Court noted that all adult beneficiaries assented to the relief requested and granted a joint motion by the parties to waive the appointment of guardians ad litem for minor contingent remainder beneficiaries and unascertained and unborn beneficiaries. Thus, the issue presented was uncontested.