If It’s Broken, Fix It! (Part II)

Authored by: Paul J. Sowell, Esq.

A recent amendment to New York law gives more Trustees the ability to fix or otherwise change the terms of a trust.  Specifically, Governor Andrew M. Cuomo recently signed a bill amending Section 10-6.6(b) of the Estates, Powers and Trusts Law, commonly referred to as New York’s “decanting” statute.  In this context, decanting is the process of a Trustee distributing trust property from one trust to another.  Decanting is oftentimes used to change the terms governing an irrevocable trust by distributing trust property from a “broken” or antiquated trust to a newly-created trust with new and improved terms.

New York was the first state to enact a decanting statute.  One main goal of the recent amendment of the law was to increase the flexibility of the law and bring it more in line with the law of the other states that now have decanting legislation.

Of course, there are many reasons that a fiduciary of a trust and the family members might want to change the terms of the trust, including correcting drafting errors and making the trust more tax efficient for the beneficiaries.

Under prior law, a Trustee could only decant a trust if the Trustee had “absolute” discretion to distribute the principal of the trust to the beneficiaries.  For example, if a Trustee’s discretion to distribute principal was limited to the ability to distribute principal for the health, education, maintenance, and/or support of the beneficiaries, the Trustee’s discretion was not absolute and the Trustee could not decant the trust.  Under the new law, even if a Trustee’s discretion to distribute principal is limited, the Trustee may decant the trust.  This change in the law provides an opportunity to Trustees with limited discretion to change the terms governing the trust because of a drafting error, changed circumstances, etc.

It is important to note that there are certain restrictions imposed by the new law when decanting a trust.  For instance, there are certain requirements regarding the identity of the beneficiaries of the new trust and the level of discretion of the Trustees of the new trust.  When decanting a trust, it is imperative that the Trustees comply with all applicable requirements and make sure that their proposed action does not violate any restrictions imposed.

What if your trust is located in a state which does not have a decanting statute? If the trust agreement allows for a change of situs of the trust, then the trustee may move the trust to New York, or any other state, which allows for decanting. The trust will need to have some legal nexus with the new jurisdiction, such as a local trustee, in order to be governed under that state’s laws.  Once the trust is moved, the trustee may then decant the trust to another trust.

There are some complex tax issues which need to be addressed before such a change in situs occurs. One must determine if the Trustee who is exercising the change in situs is considered an “interested trustee”.  A trustee who is the grantor or a beneficiary of the trust could, under the laws of some states, create a taxable situation due to the fact that changing the situs of the trust may ultimately effect how the trust’s beneficiaries are treated. Note that this power to change the situs of the trust, even without exercise, may raise unwanted tax consequences so it is best to closely examine the trust in question and ensure that the power to change situs is only exercisable by a disinterested trustee. If the trust does not have such a power to change the situs by a disinterested Trustee, then the only alternative may be to petition the local court to allow for a change in situs. Depending on the size of the trust and the issues involved, this may be warranted.  It must also be noted that it may be prudent in any event for a trustee who questions whether or not it is necessary to amend (or decant) a trust to have a written opinion in his or her trust records to show that this issue was reviewed by counsel familiar with these issues.

In summary, the new New York law may provide a solution for Trustees with limited discretion who find themselves administering an antiquated or “broken” trust or dealing with changed and unanticipated circumstances. Furthermore, trustee(s) who administer trusts outside of New York may find it prudent to consider changing the trust’s situs to New York to avail themselves of the amended law.  If you have created a trust or are the Trustee of a trust that may require a change in terms, please contact us if you would like to learn more about these planning options.

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