Bar News - March 16, 2016
Elder, Estate Planning & Probate Law: Decanting Irrevocable Trusts in NH: Tips and Recent Developments
By: Linda Garey and William V.A. Zorn
Irrevocable trusts, as the name suggests, sound as though they are incapable of being revoked or recalled. The word “irrevocable” is defined as “not possible to revoke” or “unalterable.” Yet in today’s trust world, the terms of irrevocable trusts may be altered by (among others) a process known as “decanting.” New Hampshire, which first adopted a decanting statute in 2008 and has since amended and expanded it several times, most recently in 2014 and 2015, is considered a leader in trust decanting nationally.
What is decanting?
Decanting is an administrative power in which certain trustees have the power to appoint some or all of the trust property of a trust (the “first trust”) to another trust (the “second trust”). NH RSA 564-B:4-418(a) (2015). Specifically, a trustee may create a new trust, with terms different than those in the first trust, and transfer some or all of the assets from the first trust to the second trust, so that the new and (hopefully) improved trust terms will govern the trust henceforth, all without the need for beneficiary consent or, generally, judicial approval.
Frequently, a trustee considers decanting to improve the administrative provisions of an older trust, to include or update successor trustee provisions, or to address ambiguous or less flexible trust provisions. Decanting can address changes in circumstances or in the law that were not contemplated when the trust was drafted, including tax-related changes. Other reasons for considering decanting include: reducing administrative costs; changing the situs or governing law of a trust; converting a trust share to a special needs trust; adding spendthrift provisions; creating a dynasty trust; or granting a power of appointment.
New Hampshire is at the forefront of decanting nationwide, not only because it was one of the first states to pass a decanting statute, but also because it has continued to amend and update its decanting statute. New Hampshire is one of 23 states that have a decanting statute. Decanting statutes are pending in two additional states, according to the National Conference of Commissioners on Uniform State Laws, which approved and recommended for enactment a “Uniform Trust Decanting Act” at its annual conference held in July 2015. The model Uniform Trust Decanting Act is available online.
Some states, such as Massachusetts, recognize a common law power to decant that is more restrictive than what is allowed in New Hampshire (See Morse v. Kraft, 2013). For instance, New Hampshire permits a trustee to decant a trust even if the trustee’s discretion to distribute trust property to the beneficiaries is limited by the terms of the trust (NH RSA 564-B:4-418(l)(4)), whereas in Massachusetts, a trustee may only decant if the trustee has unlimited distribution discretion (Morse v. Kraft).
Furthermore, unlike restrictions in many states’ decanting statutes, in New Hampshire, a trustee with limited discretion to distribute trust property (e.g., for the health, education, maintenance and support of one or more beneficiaries) may decant into a trust in which the trustee has unlimited discretion to distribute trust property to beneficiaries, according to NH RSA 564-B:4-418(d) (2015).
Nevertheless, there are limitations on decanting, even in New Hampshire. When a trustee (or the lawyer consulted regarding the decanting) first considers whether an irrevocable trust may be a candidate for decanting, the trustee and the lawyer should discuss the goal(s) of the decanting. Keeping the goal(s) in mind, the trustee and lawyer should consider the following to determine whether there are impediments to decanting:
1. What is the material purpose of the first trust? A trustee may not decant to the extent that the terms of the second trust are inconsistent with “a” material purpose of the first trust. NH RSA 564-B:4-418(f) (2015).
2. What was the settlor’s intent, as expressed in the terms of the trust instrument? In exercising the power to decant, the trustee has a duty to do so consistent with the settlor’s intent, as expressed in the trust. NH RSA 564-B:4-418(o) (2015).
In addition, despite the fact that the statue expressly states that the “second trust may exclude one or more of the beneficiaries of the first trust” (NH RSA 564-B:4-418(b)), recently retired NH District Court Judge Gary Cassavechia, in one of his last decisions as an active judge presiding over New Hampshire’s trust docket, voided the decanting of two irrevocable trusts, finding that the trustee did not adequately consider the interests of certain beneficiaries when decanting. See Order on Petitioners’ Amended Petition to Declare Decanting of Trusts Void ab Initio, issued Feb. 22, 2016, in Hodges v. Johnson.
Although this decision does not have precedential impact, it provides a cautionary tale to trustees when decanting into a new trust that modifies or eliminates the beneficial interest of a beneficiary. As the judge pointed out, the duty of the trustee under NH RSA 564-B:8-801 is to “distribute the trust property in good faith, in accordance with [the trust’s] terms and purposes and the interests of the beneficiaries.” Cassavechia determined that this duty extends to the interests of all beneficiaries, even a contingent beneficiary whose beneficial interest is only an expectancy.
Other Limitations and Advantages
The limitations on decanting also include the restriction that a decanting cannot add beneficiaries to the second trust who were not beneficiaries of the first trust: “The beneficiaries of the second trust may include only one or more of the beneficiaries of the first trust,” according to NH RSA 564-B:4-418(b) (2015) (emphasis added). Furthermore, state law does not allow a trustee to reduce or eliminate a vested interest of a beneficiary of the first trust. “Vested interest” is defined in NH RSA 564-B:4-418(g)(2).
Yet, despite these limitations, there are many advantages to decanting certain irrevocable trusts in New Hampshire. For instance, although the statute does not permit directly adding a beneficiary to the second trust who was not a beneficiary of the first trust, it is permissible to grant a power of appointment to a person, as long as the person was a beneficiary of the first trust, or held a power of appointment under the terms of the first trust. NH RSA 564-B:4-418(c) (2015).
The fact that the terms of the second trust may impose a standard or no standard on the trustee’s discretion to distribute income or principal (regardless of the terms of the first trust) is another reason many choose to decant in New Hampshire. Another reason to decant would be to extend the term of the first trust, as permitted under NH RSA 564-B:4-418(e), although generation-skipping transfer tax considerations may arise, so caution is advised. Because of changed circumstances, it may be beneficial to decant to trigger estate tax inclusion and achieve a step-up in basis.
In today’s climate in which decanting is an option, it is advisable to counsel clients who are creating irrevocable or revocable trusts (which become irrevocable at death) about the possibility that the trust may be subject to decanting. If a client does not want a certain provision to be alterable at a later date, designation of such provision as a material purpose of the trust would protect it from later decanting under New Hampshire law. Similarly, in either a revocable or irrevocable trust, including a provision that authorizes (or prohibits) decanting, and the scope of the decanting, is advisable, depending on client preference.
In New Hampshire, the trust laws are frequently evolving. Currently, New Hampshire has one of the most expansive decanting statutes in the country. This provides many opportunities, but both the decanting statute and the New Hampshire Trust Code contain limitations that should be taken into account when considering decanting. Nonetheless, when appropriate, decanting is an extremely useful tool to, for example, add a power of appointment, change the distribution standard, or improve administrative provisions.
William V.A. Zorn
Linda R. Garey is an associate in the Trusts and Estates Department at McLane Middleton. William V.A. Zorn is a director and vice chair of the Trusts and Estates Department at McLane Middleton. They acklowledge the assistance of associate Christopher R. Paul in the drafting of this article.