Decanting

Introduction.

Decanting is a concept derived from its traditional meaning of pouring a liquid from one container to another.  For trusts, the statute introduces a new concept that will allow trust assets to be transferred from one trust to another.  Technically it is referred to as the exercise of a trustee’s discretionary distribution authority under the original (“invaded”) trust to distribute assets of the invaded trust to a new (“appointed”) trust for the benefit of one or more of the beneficiaries of the invaded trust.  Because decanting is often thought of as the exercise of a special power of appointment by the trustee, the new statute is part of the revised Power of Appointment Statute (Minn. Stat. § 502.851).  Although in rare instances it may have been allowed by the terms of the trust instrument or common law, the statute now specifically provides the structure for determining when decanting is available and the procedures to follow.  The change is based on the New York Statute, where they also included the decanting provisions in the Power of Appointment sections.

Unlimited Discretion.

The decanting section includes definitions that apply only to this section.  It incorporates a dual-track format, depending upon the discretion the trustee has to distribute trust principal under the terms of the governing (invaded) trust instrument. Under the first track, in subd. 2, an authorized trustee with “unlimited discretion” may appoint trust principal to a new “appointed trust” for the benefit of one, more than one, or all of the current and remainder beneficiaries of the invaded trust, and the remainder beneficiaries of the appointed trust shall be one, more than one, or all of the remainder beneficiaries of the invaded trust.  “Unlimited discretion” is defined as the unlimited power to distribute principal that may include words such as best interest, welfare, comfort or happiness.  The authorized trustee is also given the authority to grant a power of appointment in the appointed trust to one or more of the current beneficiaries of the invaded trust, with specific parameters for the extent to which the power of appointment can be granted.

Limited Discretion.

Under the second track, in subd. 3, an authorized trustee with limited discretion may appoint trust principal to a new trust as long as the current and remainder beneficiaries of the appointed trust are the same as the current and remainder beneficiaries of the invaded trust.  Subd. 8 provides that the trustee is under a fiduciary duty in exercising the power. Subd. 10 sets forth how the power is exercised and the notice requirements.  Subd. 14 sets forth a number of safeguards on the exercise of the decanting power.  It provides that exercise of the power cannot limit or modify a beneficiary’s current right to mandatory distribution of income or principal, cannot decrease or indemnify against the trustee’s liability for failure to exercise reasonable care, diligence and prudence, cannot extend the terms of the appointed trust beyond any permissible rule against perpetuities of the invaded trust and cannot jeopardize other important tax features of the invaded trust.

Procedure.

When exercising the power, the authorized trustee must act as a prudent person under prevailing circumstances.  The exercise of the power must be in writing, signed, dated and acknowledged by the authorized trustee, but may be made without court approval (the authorized trustee may seek court approval if desired).  A copy of the instrument exercising the power, the appointed trust, and the invaded trust must be provided to any person having the right to remove and replace an authorized trustee of the invaded trust and all “persons interested in the invaded trust.”  Consent of the interested persons is not required, but there are procedures that allow the filing of objections within certain time periods after receipt of notice.  There are a number of limitations and prohibitions that may not be attempted by exercise of the power.

Benefits/Risks.

There are a number of reasons why decanting may be beneficial including to fix mistakes, change provisions or investment protocols, create a special needs trust, change the age of final distribution, or change the applicable state law.  At this time, however, there also are many unanswered questions regarding the potential tax consequences, since the Department of Treasury currently is not issuing any guidance regarding the tax implications.

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This blog article is the third of a six-part series focused on Minnesota’s new trust code. Below are links to other articles from this series:

Part One – “New trust code adopted by Minnesota”                     https://hjlawfirm.sites1.jaspin.website/blog/221-new-trust-code-adopted-by

Part Two – “Unchanged provisions”

https://hjlawfirm.sites1.jaspin.website/blog/244-minnesota-trust-code-unchanged-provisions

Please stay tuned for future postings in this series!