August 29, 2013

Massachusetts Supreme Judicial Court Decision Affirms Trustee Decanting Authority

The Massachusetts Supreme Judicial Court’s recent decision in Morse v. Kraft recognizes, in certain circumstances, a Trustee’s ability to decant trust assets by distributing them to a new trust in lieu of making an outright distribution to the beneficiary. Such a power can allow for outdated administrative or tax provisions in an existing irrevocable trust to be modified in a new trust instrument. Trustees of existing irrevocable trusts may want to consult their estate planning attorney to explore whether decanting might be a good option if administrative changes could improve the administration of the trust. Individuals with existing revocable trusts may want to consider adding explicit decanting authority to the trust in order to give Trustees this power.

Morse v. Kraft

In a case of first impression in Massachusetts, the Supreme Judicial Court has held that a Trustee who has broad discretion to distribute assets outright to a beneficiary may, depending on the terms of the trust, distribute those assets to a new trust that is for the benefit of the beneficiary. This ability to distribute assets from one trust to another is known as “decanting” and has been available in a number of states whose legislatures have enacted specific statutes giving trustees this power. Massachusetts does not have such a statute.

Facts of the Case

Robert and Myra Kraft established a trust in 1982, which created four separate trusts, one for the benefit of each of their four sons. At the time the trusts were created the sons were minors. The trusts were drafted so that the sons could not serve as trustees of their own trusts given that this could result in inclusion of the trust assets in the sons’ estates.

The original trustee, Richard Morse, has been serving since the creation of the trusts in 1982, and at the age of 81 is looking to retire. In order to allow the sons to now serve as trustees of their own trusts, Mr. Morse proposed that the 1982 trusts be decanted by transferring the assets into new trusts for the benefit of each son and that son’s descendants, the terms of which would allow the sons to serve as trustees of their respective trusts.

This would allow the sons to manage the assets of the trusts for their benefit. The standard for discretionary distributions to or for the benefit of the sons would be limited in a manner that avoids inclusion of the trust assets in the sons’ estates. As the trusts were irrevocable prior to the enactment of the generation-skipping transfer (“GST”) tax, the trusts were exempt from the GST tax.

However, in order that such a transfer not trigger the imposition of the GST tax, IRS regulations require that the 1982 trust “authorize distributions to a new trust” without the approval or consent of any beneficiary or court. Although the language of the 1982 trust did not contain specific authority allowing assets to be distributed to a new trust, Mr. Morse contended that he nevertheless had such authority since the terms of the trust gave him broad discretion to make distributions of income and/or principal to, or for the benefit of, each son.

The Court’s Holding

The Court, in agreeing with Mr. Morse’s position, held that because the trust gives him broad discretion to make outright distributions to or for the benefit of the beneficiaries, it thereby authorizes a distribution to a new trust if doing so would serve the beneficiaries’ best interests. Further, because the trustee’s powers are so broad, the trustee need not obtain consent of the beneficiaries or approval by a court in order to decant the trust assets.

The Court expressly stated that its holding is limited to cases where the trustee has broad discretion to make distributions to or for the benefit of the beneficiaries. The Court declined to recognize a decanting power as an inherent trust power, irrespective of the trust language. The Court also placed great emphasis on the settlor’s intent and the fact that the settlor, drafting attorney and trustee submitted signed affidavits affirming the settlor’s intent that the terms of the trust were intended to permit distributions to a new trust.

It is unclear whether the Court’s opinion would differ if settlor intent were not as clear. The Court did explicitly state that it “expects that settlors in the future who wish to give trustees a decanting power will do so expressly.”

Going Forward

The Kraft decision is notable in that it makes clear that a trustee with broad authority to distribute trust assets to or for the benefit of a beneficiary may now be able to decant those assets into a new trust, the terms of which make better financial or managerial sense or achieve a more favorable tax result. As the Court notes, a decanting power essentially allows a trustee to amend an unamendable trust.

For older trusts with outdated administrative provisions, successor trustee provisions, accounting provisions and the like, this presents an opportunity for the trustee to modify the outdated or administratively burdensome provisions in favor of more current and practical terms.

However, this opportunity may be limited to trusts where the trustees have broad discretion to distribute principal “to or for the benefit of” the beneficiaries and where evidence of settlor intent is available. For existing revocable trusts it will be important for the settlor to consider adding specific decanting authority if indeed the settlor wants the trustee to have such a power in the future.