¶ 1701
Overview
Scope of the chapter. Decanting is the distribution of the property of an irrevocable trust to a second trust, or the modification of the first trust's terms, by a fiduciary who holds a discretionary power to distribute. Chapter 16 examined the other routes by which an irrevocable trust can be changed: judicial modification, consent of the beneficiaries, and the nonjudicial settlement agreement (see supra ch. 16). Decanting differs from each of them in one respect that explains its popularity. It requires neither a court nor the consent of the beneficiaries. The trustee acts, and the trust changes. This chapter examines where that power comes from and what limits it. It begins with the common law, in which a few courts have found a power to decant within a broad grant of distributive discretion (¶ 1710), and with the two decisions of the Massachusetts Supreme Judicial Court that are the leading modern authority on that approach (¶ 1720). It then sets out the Uniform Trust Decanting Act section by section: its architecture, notice and court provisions (¶ 1730), its two tiers of decanting power (¶ 1740) and the protections it builds around both (¶ 1750). It compares the principal state statutes that preceded the uniform act and still govern many trusts (¶ 1760), examines the fiduciary duties that apply when a trustee decants, with a full discussion of Hodges v. Johnson (¶ 1770), reviews the uses and limits of the power (¶ 1780) and closes with drafting and procedure (¶ 1790).
The idea. The logic of decanting is simple. A trustee who may distribute principal outright to a beneficiary may, the argument runs, distribute it to a trustee to hold for that beneficiary on new terms, because the lesser power is included in the greater. The Massachusetts court put it in one sentence: "[i]n effect, a trustee with decanting power has the authority to amend an unamendable trust, in the sense that he or she may distribute the trust property to a second trust with terms that differ from those of the original trust." Morse v. Kraft, 466 Mass. 92, 95 (2013). The same court added in the next sentence the limit that runs through every later authority: "A trustee can only exercise a decanting power, however, in keeping with fiduciary obligations." Id. Everything in this chapter elaborates those two propositions. The power exists because distribution includes distribution in further trust; it is bounded because the person who holds it is a fiduciary.
Why decanting matters in modern trust design. The modern trust is designed to last for generations (see infra ch. 22) and to be governed by several persons (see supra chs. 6–15). A trust that will run for a century cannot be drafted to anticipate every change in tax law, family circumstance, investment practice or governing statute. Decanting is the most widely used means of adapting such a trust after the settlor can no longer amend it. A trustee decants to add a directed-trust structure or a protector to a trust drafted before those devices were common (see infra ¶ 1780.02), to move the trust's situs and governing law (see infra ch. 20), to extend its duration where the governing law permits (see infra ¶ 1780.04), to convert a beneficiary's share into a supplemental-needs trust (see infra ¶ 1740.07), to correct drafting errors and to modernize administrative provisions. It is also the device most exposed to abuse, because a power that can change beneficial interests without consent can be used to favor one beneficiary over another or to serve a settlor who has fallen out with part of the family. The cases that limit decanting are, for the most part, cases of that kind.
Three sources of the power. A trustee may hold a power to decant from one or more of three sources. The first is the trust instrument itself, which may confer the power expressly, as modern instruments commonly do, or may confer it by implication through a broad grant of distributive discretion. The second is a decanting statute, of which the Uniform Trust Decanting Act is now one model among several. The third is the common law, which in a few jurisdictions recognizes a power to decant within the terms of the instrument even without express language. The uniform act is explicit that it does not displace the other sources: it "does not limit the power of a trustee, powerholder, or other person to distribute or appoint property in further trust or to modify a trust under the trust instrument, law of this state other than this [act], common law, a court order, or a nonjudicial settlement agreement." Unif. Trust Decanting Act § 3(d) (2015). Delaware's statute contains a parallel preservation clause. Del. Code Ann. tit. 12, § 3528(d). A trustee who cannot satisfy the statute may therefore still rely on the instrument or on the common law, and a trustee who has an express power in the instrument may elect to proceed under the statute for its procedural protections.
Terminology. This chapter uses the vocabulary of the uniform act. The first trust is the trust whose property is distributed or whose terms are modified; the second trust is the trust that receives the property or the first trust as modified; the authorized fiduciary is the person who holds the decanting power. Unif. Trust Decanting Act § 2(3), (12), (23). The older statutes use other words. New York and Alaska speak of the invaded trust and the appointed trust, N.Y. Est. Powers & Trusts Law § 10-6.6(b); Alaska Stat. § 13.36.157(a); Nevada of the original trust, Nev. Rev. Stat. § 163.556(2). The differences are verbal. The statutes also differ in whether they describe decanting as the exercise of a power of appointment. Delaware, Nevada and Alaska do so expressly, Del. Code Ann. tit. 12, § 3528(c); Nev. Rev. Stat. § 163.556(10); Alaska Stat. § 13.36.158(a), which matters chiefly for the rule against perpetuities (see infra ¶ 1780.04). The uniform act instead treats decanting as a fiduciary power in its own right, which is one reason it insists that only a fiduciary may exercise it (see infra ¶ 1730.03).