New decanting law will make it easier to change irrevocable trusts

Last month, California enacted the Uniform Trust Decanting Act, which will now apply to all California trusts unless the trust instrument expressly opts out of the statute provisions. Trust decanting allows a trustee to effectively modify or remove trust provisions from an irrevocable trust by pouring, or distributing, trust assets from an old trust into a new trust. Decanting can be especially helpful when estate planning documents are outdated or otherwise do not reflect the original intent of the trustor.

While many states have decanting statutes, California did not, prior to this recent enactment. Thus, a court proceeding or the consent of all trust beneficiaries was required for the modification of a California irrevocable trust, unless trust language allowed otherwise. Many estate planning attorneys routinely include such decanting language in their trust documents. Now, after the new law and subject to certain exceptions, a trustee can modify a California irrevocable trust without the consent of the trustor and beneficiaries, or prior court approval, by pouring the assets from the old trust into a new trust with more favorable provisions. However, the statute is limited in scope and only certain trusts may be decanted.

Interestingly, and subject to certain conditions, a trustee can use the decanting powers to change a grantor trust to a non-grantor trust, or vice versa. Two categories of modification through decanting are allowed, those relating to trustees with "limited distributive discretion" and those applicable to trustees with "expanded distributive discretion." Basically, the more discretion allowed to the trustee with respect to principal distributions, the greater the decanting modification options allowed.

Under the statute, a trustee with limited distributive discretion has authority to distribute trust principal to beneficiaries based on an ascertainable standard. Most commonly, a trust provides the trustee with the power to distribute principal for the beneficiary's health, education, maintenance or support, otherwise known as the HEMS or reasonable support standard. Now, a trustee with limited distributive discretion can exercise the decanting power to modify only administrative trust provisions, such as those governing trustee powers or successor trustee provisions. The trustee still may not materially change the trust's dispositive provisions.

A trustee with expanded distributive discretion has discretion to distribute trust principal to beneficiaries beyond that allowed under an ascertainable or reasonable support standard. Such expanded standards are included in a trust to get greater creditor protection or for tax benefit reasons. Under this broader standard, a trust can provide the trustee with sole discretion to make distributions of principal to beneficiaries. A trustee with such expanded distributive discretion can now use the decanting power to modify both administrative provisions and select dispositive provisions of the trust. The decanting power can allow for a change in distribution standards, to grant a power of appointment, to eliminate a beneficiary or to extend the duration of the trust. A trustee remains limited with respect to adding a new beneficiary though could perhaps grant a power of appointment to a beneficiary, thereby indirectly creating a similar effect.

But the decanting power as granted by stature is not expansive, and the trustee cannot modify the trust provisions which address trustee liability, trustee compensation or the replacement or removal of a trustee. The decanting power also cannot be used in any way that would risk the tax benefits of the original trust. Savings language in the statute avoids inadvertent negative tax consequences, which might arise after a decanting related change.

Changes to charitable interests are also limited. A trust established solely for charitable purposes cannot be decanted. However, a trust containing a charitable interest can be decanted under the statute (assuming it otherwise qualifies). However, if the charitable interest is the ultimate named remainder beneficiary and all family members are deceased, the new trust cannot decrease the charitable interest.

Notice must be given at least 60 days before the decanting power is exercised. Such notice must be provided to the trustor and each qualified beneficiary. It is also required to be given to those holding a presently exercisable power of appointment over the original trust, anyone with a current right to replace or remove the trustee, any other trustee of the original trust and any trustee of the new trust. The California Attorney General must also be given notice if the original trust has a charitable interest. Detailed provisions include notice requirements for certain trusts established for the benefit of minors. Covered in the act are guidelines for giving any such notice, including warning language notifying recipients of their right to contest the decanting.

Overall, while the California Uniform Trust Decanting Act will make changing existing irrevocable trusts easier in some situations, it is limited and not as advantageous as the decanting provisions of certain other states. Trustees with limited distributive discretion are constrained in that only administrative provisions can be modified. Additionally, the strict notice provisions may still necessitate court intervention at times. Trusts should continue to be written to include more advantageous decanting language in the terms of the trust itself, as was advisable prior to the enactment of this statute. However, for those trusts not containing such language, this act could be of benefit. Other jurisdictions still offer trust law provisions more flexible and perhaps advantageous than are those allowed under California law.