Chapter 28 - § 28.4 • COLORADO UNIFORM TRUST DECANTING ACT

• Jurisdiction: Colorado

§ 28.4 • COLORADO UNIFORM TRUST DECANTING ACT

The Act took effect in Colorado on August 10, 2016. It provides trustees and trust and estate practitioners with a comprehensive structure and procedure for decanting. The following sections summarize pertinent provisions of the Act, including the availability of decanting in special situations and limitations on decanting under the Act.⁴

§ 28.4.1—Can (and Should) a Trust Be Decanted Under the Act?

When determining whether to decant a Colorado trust under the Act, the trustee first should consider whether (1) the Act applies to the trust, (2) the trustee's power to decant is limited in any way by the terms of the trust instrument, (3) the decanting would be an appropriate exercise of trustee power in light of the trustee's fiduciary duties, and (4) the desired changes to the trust can be made based on the trustee's level of discretion over distributions of trust principal. The effect of the trustee's level of discretion is described in more detail below, but the Act addresses the first three considerations as follows.

Scope and Applicability of Act

The Act applies to any trust that has its principal place of administration in Colorado or that provides in its agreement that it is governed by the laws of Colorado for the purpose of administering the trust or determining the meaning of its terms. C.R.S. § 15-16-905. The trust must be irrevocable (or revocable by the settlor only with the consent of the trustee or a person holding an adverse interest). C.R.S. § 15-16-903(1). The Act does not apply to a wholly charitable trust. C.R.S. § 15-16-903(2).

Settlor's Limitations on Decanting

The settlor of a trust may limit or prohibit a trustee's power to decant under the Act, or in general, by including express language to that effect in the trust instrument. C.R.S. § 15-16-915(1) and (2). However, spendthrift clauses and general prohibitions in the trust instrument on amendment or revocation do not prevent the trustee from exercising the decanting power. C.R.S. § 15-16-915(3). The trustee should review the trust instrument carefully for provisions that either prohibit or restrict the decanting power or, alternatively, provide an express decanting power. If the trust instrument expressly permits a trustee to modify a trust or distribute trust property to another trust, the trustee may still choose to exercise the decanting power granted under the Act (unless doing so is specifically prohibited by the trust instrument). C.R.S. § 15-16-915(4).

Trustee's Fiduciary Duties

A trustee's exercise of the decanting power is subject to the trustee's fiduciary duties, including the duty to act in accordance with the purposes of the "first trust" (the Act's term for the original trust over which the trustee is exercising the decanting power). C.R.S. § 15-16-904(1).⁵ Therefore, a trustee should consider whether a proposed decanting would be consistent with the purposes of the first trust and the settlor's intent. The Act does not create a duty to exercise the decanting power or inform beneficiaries of its existence. C.R.S. § 15-16-904(2).

§ 28.4.2—Standards for Decanting: Bifurcated Approach

The Act provides two separate decanting powers based on the level of discretion granted to the trustee. The trustee's level of discretion over distributions of trust principal determines the changes the trustee may make to the trust's structure and terms. A trustee must first determine whether the trustee has "limited distributive discretion" or "expanded distributive discretion." C.R.S. § 15-16-912 (limited distributive discretion); C.R.S. § 15-16-911 (expanded distributive discretion). With the exception of certain special needs trusts (or conversions to special needs trusts), if the trustee has no discretion over principal distributions, the trustee cannot decant under the Act.

Decanting with Limited Discretion

If a trustee's discretionary power over principal distributions is limited to an ascertainable standard or a reasonably definite standard, the trustee has limited distributive discretion. C.R.S. § 15-16-912(1). An ascertainable standard is one permitting distributions for a beneficiary's health, education, maintenance, and support. C.R.S. § 15-16-902(2).⁶ A reasonably definite standard is a "clearly measurable standard" under which the trustee is "legally accountable." C.R.S. § 15-16-902(21).⁷

If a trustee has limited distributive discretion, the trustee has the power to decant, but the beneficiaries must receive, under the second trust⁸ (or trusts in the aggregate if distributions are made to more than one trust), beneficial interests that are substantially similar to the beneficial interests of the beneficiaries under the first trust. See C.R.S. §§ 15-16-902(23) and -912(3). In general, this means that the trustee can decant to update administrative and trustee provisions but cannot make significant changes to the dispositive structure of the trust if distributions are limited under the original instrument.

A trustee with limited distributive discretion can divide a trust if the beneficial interests under the second trusts, in the aggregate, are substantially similar to the interests under the first trust. This may be a useful tool to divide trusts without obtaining court permission, in addition to the trustee's authority to divide trusts under C.R.S. § 15-5-417.

Decanting with Expanded Discretion

A trustee with expanded distributive discretion has discretionary powers that are not limited to an ascertainable standard or a reasonably definite standard. C.R.S. § 15-16-902(11). A trustee who has absolute discretion, or who can make distributions for a beneficiary's happiness, comfort, or welfare, or under some similarly broad standard, has expanded distributive discretion. Cf. Treas. Reg. § 20.2041-1(c)(2) (noting that a power to make distributions for comfort, welfare, or happiness is not an ascertainable standard).

A decanting by a trustee who has expanded discretion is not subject to the requirement that the beneficial interests remain substantially similar in the second trust. Therefore, a trustee with expanded distributive discretion can modify beneficial interests in the trust. The basis for this power is the fact that...