Decanting in Colorado
Or, Ways in Which Your Dusty Old Irrevocable Trust is Like a 1970s French Bordeaux
Last year, Colorado passed the Uniform Trust Decanting Act, the first of two states to pass the uniform act. (New Mexico was the second.) Twenty-five states now have decanting in some form.
Decanting a trust occurs when you distribute the assets of one trust (Trust #1) into a new, second trust (Trust #2). Through decanting, Trust #2 contains new and more appropriate terms than Trust #1, while still retaining the Settlor’s original intent. Decanting permits you to dust off an old irrevocable trust that may now contain terms that put it at odds with its original intent. This can happen when a trust is created years, even decades, prior to the trust’s ultimate termination.
One of the best examples occurs when a grandparent sets up a lifetime trust for his or her children before the trust is ultimately distributed to the grandchildren. In this case, a grandchild may not yet be born when the trust is created. Years after the trust is created, a grandchild may be born with special needs and, thus, a special needs trust would be appropriate for that child. (A special needs trust will not adversely affect the grandchild’s qualification for governmental assistance, among other benefits.) By decanting Trust #1 into Trust #2, a special needs trust may be created to protect that beneficiary and the trust assets.
Other benefits to decanting may include removing or modifying administrative provisions that are no longer appropriate. This may include rules regarding trustee power and succession or other administrative or tax provisions.
The Uniform Decanting Act has important protections for the Settlor’s original intent. The act of decanting is a fiduciary power and only applies if the fiduciary (generally, the trustee) has discretion over the principal. Another important limitation exists if Trust #1 is restricted to an ascertainable standard, i.e., a typical “health, education, maintenance and support” provision. In that case, Trust #2 must be similarly limited to that same ascertainable standard. If Trust #1 contains mandatory income distributions, those too must be continued into Trust #2. A further restriction on decanting is that it cannot be used to modify a charitable trust or the interest of a charitable beneficiary.
In many ways, decanting looks similar to a court petition to modify the terms of an irrevocable trust. For example, notice to all beneficiaries (though not consent) is required to decant. Though a fiduciary can petition the court for instruction or to seek confirmation that the proposed decanting is within his fiduciary duties, court approval is not required. This can make decanting a more efficient and cost effective method to modify the terms of an existing trust.
This efficiency applies to practical matters as well. The statute makes clear that decanting into a second trust may not require the creation of a new trust. If the second trust is treated as a continuation of the first trust, property does not need to be retitled and a new tax identification number does not need to be obtained.
Depending on the changes sought, decanting may be an appropriate method to modify the terms of an irrevocable trust.