Saturday, September 4, 2010
William R. Culp, Jr. (attorney, Charlotte, NC) & Briani Bennett Mellen (attorney, Columbia, SC) recently published their article entitled Trust Decanting: An Overview and Introduction to Creative Planning Opportunities, 45 Real Prop., Tr. & Est. L. J. 1 (Spring 2010). The introduction is below:
Decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries. Potentially, common law provides authority for decanting, but a state statute or the terms of the trust instrument may expressly authorize a trustee to decant trust property to another trust. Trustees may decant to achieve a variety of favorable tax or nontax results or to address changes in state law or in other circumstances affecting management or administration of the trust after it has become irrevocable.
The rationale that underlies decanting is that if a trustee has the discretionary power to distribute property to, or for the benefit of, one or more current beneficiaries, then the trustee, in effect, has a special power of appointment that should enable the trustee to distribute the property to a second trust for the benefit of such beneficiaries. The trustee, moreover, should be able to give the current beneficiaries a special or general power of appointment under the terms of the second trust, the latter of which would be the functional equivalent of distributing the property outright to the beneficiaries. This view is in accord with the treatment of a trustee’s discretionary power to distribute as a special power of appointment under the Restatement (Second) of Property: Donative Transfers (the Second Restatement) and the Restatement (Third) of Property: Wills & Other Donative Transfers (the Third Restatement), although the Third Restatement additionally highlights the fact that, unlike a run-of-the-mill special power of appointment, fiduciary standards are imposed on a trustee’s discretionary distribution power.
In 1992, New York was the first state to enact a decanting statute allowing a trustee to appoint trust property in favor of another trust. As of the date of this Article, nine other states—Alaska, Tennessee, Delaware, South Dakota, Florida, New Hampshire, North Carolina, Arizona, and Nevada— also had passed decanting statutes. Although New York enacted its statute with an eye towards extending the generation-skipping transfer (GST) tax exempt status of grandfathered trusts, practitioners have used decanting statutes to achieve a variety of favorable tax and nontax results.