Morrison & Foerster LLP: Decanting a California Trust

By Joshua
Glucoft,* Morrison Foerster LLP

In the administration of an irrevocable
trust, situations can arise that were beyond the anticipation of the
trustor.  Therefore a trustee may want to
“decant” a trust by transferring funds from one trust to another with
preferable terms.  The trustee may be
unsure, however, as to when the trustee is authorized to decant the trust.  “A trustee’s powers include those specified
in the trust instrument, those conferred by statute, and those needed to
satisfy the reasonable person and prudent investor standards of care in
managing the trust.”The first source of such authority therefore
would be the trust instrument itself, but the source of authority to decant a
trust is less clear when the trust instrument is silent or ambiguous with
respect to decanting.

The second potential source of authority is
statutory authorization.  At least 15
states have statutes explicitly authorizing some form of decanting when certain
conditions are satisfied, and several more states are considering legislation
on the topic.However, California does not have a statute
clearly authorizing a trustee to decant trusts3 nor does the state legislature appear to be currently considering such a bill.4

The third potential source of authority would
be the trustee’s duty “to satisfy the reasonable person and prudent investor
standards of care in managing a trust.”5 However, except in cases of clearly faulty
trust instruments, there may not be a robust demonstration that decanting to
obtain preferable terms would be necessary to maintain the reasonable person and
prudent investor standards of care in managing a trust.6

A trustee’s ability to decant may, however,
be established by common law.  For
example, in In re Estate of Spencer,
232 N.W.2d 491, 493 (Iowa 1975) [enhanced version available to lexis.com subscribers], Ms. Spencer left some of her estate in
trust for the benefit of her children with a non-general power of appointment
granted to her husband as trustee.  Upon
his death, the husband appointed the trust property in further trust rather
than allowing the trust property to pass outright to Ms. Spencer’s
children.  Id. at 494.  The Iowa Supreme
Court held that such an exercise of the power of appointment was valid because
the trust instrument did not clearly manifest a contrary intent.  Id.  There is a line of somewhat old but still
valid case law from other jurisdictions holding that a trustee with a
non-general power of appointment is allowed to appoint in further trust.  See,
e.g.
, In re Estate of Mayer, 672
N.Y.S.2d 998, 1000 n.2 (Sur. Ct. 1998) [enhanced version available to lexis.com subscribers] (“[T]he power of a trustee whose discretion
is unlimited to appoint in further trust had been judicially recognized in
other jurisdictions.”).

The subtle nexus supporting the common law
ability of trustees to decant is that a trust that gives discretion to the
trustee to invade principal or pay income or principal to or among the
designated beneficiaries essentially grants the trustee a non-general power of
appointment.  Restatement (Second)
of Prop.: Donative Transfers § 11.1 cmt. d (1986) (“The discretion given to the
trustee gives the trustee the power to designate beneficial interests in the
trust property. . . . Consequently, the trustee holding a discretionary power
has a power of appointment as defined in this section.”); see, e.g., Ariz. Rev.
Stat. Ann. § 14-10819 (2012)
(using “discretion” essentially
interchangeably with “special power to appoint” in granting trustees with
discretion over distribution, but not specifically a power to appoint, the
authority to decant by appointing in further trust).  While it may be more common to reference a
trustee’s discretion over distribution as distinct from a power of appointment, functionally they perform substantially
equivalent roles, although a trustee is subject to a fiduciary duty in making
distributions7 to which a beneficiary who holds a non-general power of appointment may not be
subject.  A broader body of case law and
the Restatements support the more general proposition that the holder of a
non-general power of appointment may appoint in further trust, and it was this
foundation that provided the grounds for extending the authority to a trustee
with discretion over distribution to distribute in further trust.  E.g.,
Nat’l State Bank of Newark v. Morrison,
9 N.J. Super. 552, 559 (Sup. Ct. 1950) [enhanced version available to lexis.com subscribers] (“If, but only if, the donor does not
manifest a contrary intent, the donee of a special power can effectively
appoint interests to trustees for the benefit of objects.”) (internal
alterations omitted) (quoting Restatement (First) of Property § 358);
Restatement (Third) of Trusts § 10 cmt. f (2003) (“[T]he donee can effectively appoint the property subject to the power,
or any portions of or interests in that property, in trust for the benefit of
permissible appointees (the ‘objects’) of the power unless the terms of the
trust or other disposition that created the power of appointment clearly
manifest the creator’s (the ‘donor’s’) contrary intention.”); Restatement
(Second) of Prop.: Donative Transfers § 12.2 (1986) (“The scope of the donee’s
authority as to appointees and the time and manner of appointment is unlimited
except to the extent the donor effectively manifests an intent to impose
limits.”).

The common law
ability of a trustee to decant therefore relies on two prerequisites: (1) there
is no clear manifestation of intent to disallow decanting, and (2) the trustee
has some discretion over distribution.  With
respect to the first requirement, the
intent of the trustor is a dispositive consideration and clear manifestations
of intent to disallow appointments in further trust cannot be overcome.  Thomas
v. Gustafson
, 45 Cal. Rptr. 3d 639, 643 (Ct. App. 2006) [enhanced version available to lexis.com subscribers] (“[The] extent of trustee’s discretion [is] defined
by settlor’s intention.”) (citing In re
Miller’s Estate
, 230 Cal. App. 2d 888, 908-09 (Dist. Ct. App. 1964) [enhanced version available to lexis.com subscribers]); see,
e.g.
, Union New Haven Trust Co.
v. Taylor
, 50 A.2d 158, 170 (Conn. 1946) [enhanced version available to lexis.com subscribers] (holding that an appointment in further
trust that distributed only income for the life of the beneficiaries was not
valid where the original trust directed that the principal “be paid over”); In re Bracken’s Estate, 11 Pa. D.
C.2d 521, 523 (Orphans’ Ct. 1956) [enhanced version available to lexis.com subscribers] (holding an appointment in further trust
invalid when the trust directed that the trust property “be paid over
absolutely”).  However, in all of these
instances disallowing appointment in further trust, the intent of the trustor
was explicit and clear that the trust property needed to be distributed
outright.Accordingly, silence and possibly even
ambiguous9 language in the trust instrument might still allow for decanting, as long as
such a construction is consistent with the ascertainable intent of the trustor.

With respect to the second requirement for a
common law ability to decant, in those cases allowing a trustee to appoint in
further trust, the trustee had relatively broad discretion in the distribution
of principal or income.  See, e.g., Phipps v. Palm Beach Trust Co., 142 Fla. 782, 783-83 (1940) [enhanced version available to lexis.com subscribers]
(“[A]n individual and a corporate trustee clothed with absolute power to administer a trust estate in the interest of
designated beneficiaries [may] create a second trust estate.”) (emphasis
added).  Likewise, of the states that have codified the ability to decant,
approximately half require that the trustee must have the power to invade
principal10 and the vast majority of the rest explicitly require at least that the trustee
has the discretion to distribute principal or income.11 Accordingly, decanting of California trusts
should only be considered by trustees that have relatively broad discretion in
the distribution of at least trust income, if not principal.

A trustee may be
able to work around uncertainty by transferring jurisdictions, if the trust has
requisite ties to a state with more favorable decanting statutes.  Several
of the states with explicit decanting statutes provide that those statutes
apply to trusts that have their governing jurisdiction transferred to that
state.  A trustee of a California trust may petition a court to transfer
the place of administration to another state pursuant to California Probate Code sections
17401-04
.12 Transferring
jurisdictions might be the preferred option for trustees with relatively less
management authority as granted by the trust instrument. 

Ideally
California would one day consider a statute that explicitly allows decanting
and clearly delineates the requirements that would apply.  Until then, a trustee evaluating whether or
not to decant an irrevocable trust can consider the authority for doing so, the
tax implications, and applicable perpetuities provisions.  A trustee will also need to consider several
other safeguards before decanting, including but not limited to:  providing notice,13 seeking court approval,14 and possibly waiting to decant until there is a current need to distribute.15  Alternatively, a trustee seeking the
certainty provided by decanting statutes may investigate whether it is possible
to transfer jurisdictions to take advantage of another state’s statutory grant
of the power.

__________________________________

* The author was a 2012 summer
associate at Morrison Foerster LLP.

Morrison Foerster’s Trusts and Estates group
provides sophisticated planning and administration services to a broad variety
of clients.  If you would like additional
information or assistance, please contact Patrick McCabe at (415) 268-6926 or
PMcCabe@mofo.com.

© Copyright 2012 Morrison
Foerster LLP.  This article is published
with permission of Morrison Foerster LLP. 
Further duplication without the permission of Morrison Foerster
LLP is prohibited.  All rights
reserved.  The views expressed in this
article are those of the authors only, are intended to be general in nature,
and are not attributable to Morrison Foerster LLP or any of its
clients.  The information provided herein
may not be applicable in all situations and should not be acted upon without
specific legal advice based on particular situations.


1. Moeller
v. Superior Court
, 16 Cal.
4th 1124, 1129 (1997) [enhanced version available to lexis.com subscribers].

2. Rashad
Wareh Eric Dorsch, Decanting: A Statutory Cornucopia, Trusts
Estates, Mar. 2012, at 22 (Already enacted: Alaska; Arizona; Delaware; Florida;
Indiana; Missouri; Nevada; New Hampshire; New York; North Carolina; Ohio; South
Dakota; and Tennessee.  Considering legislation:
Colorado; Illinois; and Michigan.); Va. Code Ann. § 55-548.16.1(B) (Virginia, already enacted);
H.R. 155, 2012 Reg. Sess. (Ky. 2012), http://www.lrc.ky.gov/record/12RS/hb155.htm (Kentucky, already enacted).

3. See Cal. Prob. Code § 16200-49 (2012).

4. See Legislative Index, Legislative Counsel
of California (last updated June 6, 2012), http://www.leginfo.ca.gov/legindexhtml/legindexALEAD.html.

5. Moeller, 16 Cal. 4th at 1129.

6. See id.

7. Cal. Prob. Code § 16081 (2012).

8. See
Taylor
, 50 A.2d at 171 [enhanced version available to lexis.com subscribers]; Bracken’s Estate, 11 Pa. D. C.2d
at 522 [enhanced version available to lexis.com subscribers].

9. Courts
seek to construe ambiguous language in a manner consistent with the intent of
the trustor, and even a vague, general intent of flexibility in trust
administration may be extended to allow flexibility in distribution, potentially
including the ability to decant, when the instrument language is ambiguous.  For example, in Romans v. Pearce, No. F055910, 2009 Cal. App. Unpub. LEXIS 4614, at
*9-10 (Cal. App. 5th Dist. June 11, 2009) (unpublished) [enhanced version available to lexis.com subscribers],
the court held that granting the trustee with essentially all of the powers
provided by statute indicated an intent to provide flexibility and that “this
flexibility was intended to extend to the distribution of the Trust estate as
well.”  The court subsequently allowed
the trustee to distribute shares in an LLC that owned the real estate that
comprised the trust property instead of distributing the land in kind, where
the instrument required distribution of the arguably ambiguous “trust estate”
upon termination.  Id.

10. Alaska Stat. Ann. § 13.36.157(a) (2012); Del. Code Ann. tit. 12, § 3528(a) (2012); Fla. Stat. Ann. § 736.04117(1)(a) (2012); Ind. Code Ann. § 30-4-3-36(a) (2012); N.Y. Est. Powers Trusts Law § 10-6.6(b) (2012); Ohio Rev. Code Ann. § 5808.18(A)(1) (2012); Tenn. Code Ann. § 35-15-816(b)(27)(A) (2012).

11. H.R.
155, 2012 Reg. Sess. (Ky. 2012), http://www.lrc.ky.gov/record/12RS/hb155.htm;
Mo. Ann. Stat. § 456.4-419(1) (2012); Nev. Rev. Stat. Ann. § 163.556(1) (2011); N.C. Gen. Stat. Ann. § 36C-8-816.1(b) (2012); S.D. Codified Laws § 55-2-15 (2012); Va. Code Ann. § 55-548.16.1(B) (2012).

12. A
trustee may petition the court for a transfer of property or place of
administration by providing the court with all the information required in
section 17402 and by providing notice to all beneficiaries and subsequent
trustees pursuant to section 17403.  The
court may then grant the order pursuant to section 17404 if the transfer is in
the best interest of the trust and the beneficiaries, provided that the new
trustee is able to administer the trust and the transfer does not violate the
terms of the trust instrument.

13. See, e.g., Fla. Stat. Ann. § 736.04117(4) (2012) (requiring notice to all
qualified beneficiaries at least 60 days prior to decanting).

14. See, e.g., Va. Code Ann. § 55-548.16.1(I) (2012) (granting, but not
requiring, the trustee authority to commence judicial proceedings to approve
the decanting).

15. See, e.g., N.C. Gen. Stat. Ann. § 36C-8-816.1(b) (2012) (explicitly allowing
decanting even when there is no need to distribute).

….

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