In September, 2018, California enacted the Uniform Trust Decanting Act, which allows trustees to modify the terms of a trust (with some limitations), without court approval or the consent of the beneficiaries, by “decanting” the trust. Decanting is the process by which assets of a trust (the “first trust”) are “decanted” or “poured” into a new trust (the “second trust”) with new terms that meet the needs of changing circumstances for the beneficiaries and trustees. The new statute also allows a trustee to modify the terms of the first trust without creating a second trust.
Twenty eight other states have adopted decanting over the last 26 years, and California has finally modernized its trust law to include the decanting of trusts.
Types of Trusts that Can Be Modified
The statute allows for the decanting of irrevocable trusts and of revocable trusts where revocation requires the consent of the trustee or a person who has a right or concern that is contrary to the interest of the trustor. A charitable trust cannot be decanted. Additionally, a trust that includes a provision expressly prohibiting the use of decanting cannot be decanted.
Terms that a Trustee Can Modify
In exercising a decanting power, the trustee must act in accordance with its fiduciary duties and the purposes of the first trust. There are limitations on the terms that a trustee can modify. The limitations depend on a trustee’s specific power to make distributions to the beneficiaries.
A trustee with the power to make distributions to beneficiaries subject to an “ascertainable standard,” such as for health, education, maintenance, or support, is deemed to have “limited distributive discretion.” A trustee with this limited discretion can modify only administrative provisions, such as successor trustee designations, and cannot materially change a beneficiary’s interest in the trust.
A trustee with the power to make distributions in his or her unlimited discretion is deemed to have “expanded distributive discretion.” A trustee with this discretion has the power to modify administrative and dispositive provisions, which includes changing a beneficiary’s interest (subject to certain limitations).
In either case, trustees cannot make the following modifications:
- Include as a current beneficiary in the second trust a person who is not a current beneficiary of the first trust;
- Include as a presumptive remainder beneficiary or successor beneficiary in the second trust a person who is not a current beneficiary, presumptive remainder beneficiary, or successor beneficiary of the first trust;
- Reduce or eliminate a vested interest of a beneficiary; or
- Make any change that affects the tax benefits of the first trust, such as qualifying for a marital deduction or a charitable deduction.
For example, if A and B are the only current beneficiaries of the first trust and have a right to a mandatory distribution of income, the trustee will not be able to utilize the decanting power to reduce or eliminate the distribution of income to A and B in the second trust. Moreover, the trustee will not be able to add C as a current beneficiary of the second trust.
Decanting can be used to change the situs and governing law provisions to move the trust out of California to another jurisdiction, assuming there is sufficient nexus to the new jurisdiction.
No consent is necessary for a trustee to exercise the decanting power, but the trustee must provide notice to the following persons:
- Each trustor of the first trust;
- Each beneficiary who is entitled to a distribution of income or principal of the first trust, or would be entitled to such a distribution if the first trust terminated;
- Each holder of a presently exercisable power of appointment over any part of the first trust;
- Each person with the right to currently remove or replace the trustee;
- Each other trustee of the first trust;
- Each trustee of the second trust; and
- If applicable, the Attorney General.
The notice must also include other specific items outlined in the statute.
If you are a trustee of a California trust, this new statute means you no longer need the consent of beneficiaries or court approval to modify certain terms of a trust. However, this power has several limitations and requires you to provide notice to a number of persons. If you are a beneficiary of a California trust, this means certain terms of the trust can be modified without your approval. Any trustee who is seeking to modify the terms of a trust, or any beneficiary who has a concern about any potential modification of a trust, should contact their attorneys for specific advice.