TITLE TRUST AND ESTATE LAW
BY JONATHAN F. HASKELL AND MARC A. CHORNEY.
This article examines trust decanting in connection with dissolution of marriage proceedings within the framework of the Ferri v. Ferri-Powell opinions.
Trust and estate practitioners should be wary of decanting. When a trust is decanted, the trust property is typically transferred to another trust or the same trust with different terms. Decanting has the effect of "amend[ing] an unamendable trust, in the sense that [the trustee] may distribute the trust property to a second trust with terms that differ from those of the original trust."1 Thus, when a trust is decanted, there is a risk that the character of the trust property will change. For example, a trust that is property subject to division in a divorce proceeding can potentially be changed to a trust that is not marital property and thus not subject to division in a divorce.
This article discusses decanting in the context of divorce property divisions. It focuses on four opinions involving the Ferri v. Ferri-Powell divorce2 to illustrate why practitioners must remain vigilant when dealing with trust decantings.
Decanting may be accomplished pursuant to a statutory provision3 or pursuant to judicial doctrine of a state.4 Decanting is a relatively new phenomenon and has recently been employed in a variety of circumstances. "[In] a very real sense, when a trustee decants, [he] rewrites the settior's terms for the first trust. An obvious question raised is what limitations exist in regard to such trustee rewrites."5
Without a violation of a specific limitation on a trustee's decanting power, "it is difficult, if not impossible, to predict how courts will hold trustees accountable for exercising decanting powers. There is very little case law on trust decanting."6 But courts will likely find problematic those exercises of decanting powers that a re inconsistent with other principles of law or that constitute a violation of public policy.
The Colorado Uniform Trust Decanting Act
Colorado adopted its version of the Uniform Trust Decanting Act in 2016.7 The Colorado Act permits a trustee to change the dispositive provisions of the trust provided that the trustee has "expanded distributive discretion." Expanded distributive discretion is defined as sole or absolute discretion (sometimes referred to as "extended discretion") or the power to distribute for purposes beyond ascertainable standards (such as for a beneficiary's benefit, comfort, or happiness).8 The Colorado Act requires the trustee to give notice of the proposed decanting to "qualified beneficiaries," who are beneficiaries currently eligible to receive distributions of income or principal, or who would be eligible to receive such distributions in the future.9 The Colorado Act differs from the Uniform Act in one very important aspect: the Colorado Act does not affect
(1) whether a beneficial interest in a first trust or second trust is considered property or an asset of a spouse for purposes of distribution of property under the Colorado divorce property division statute; or
(2) the power of a divorce court to fashion remedies between the parties in an action under CRS Tide 14.
Although the Colorado Act prohibits a decanting from affecting the property division in divorce, it does not affect a decanting made under the laws of another state that governs the trust instrument, or other means of achieving a trust modification.11
The Ferri decanting involved consideration of a trust in a Connecticut divorce that was governed by Massachusetts law. The Ferri opinions thus shed light on issues Colorado practitioners and courts should consider when facing a trust decanting involving a party to a pending dissolution of marriage proceeding, where the trust is governed by another state's law.
Ferri v. Powell-Ferrl: The Facts
Ferri 212 sets forth the facts of the Ferri divorce. As relevant to the topic of trust decanting, Ferri, the husband, was the beneficiary of a trust his father established in 1983 (the 1983 Trust). The 1983 Trust gave husband a right to withdraw portions of the trust property at different ages. One of trustees of the 1983 Trust was husband's brother, who was also his business partner, and the other was an apparently unrelated individual (the trustees).
In 2010, wife filed to dissolve the marriage in Connecticut. While the divorce was pending, in March 2011, the trustees created the Declaration of Trust for Paul john Ferri, Ir. (the 2011 Trust). As with the 1983 Trust, husband was the sole beneficiary of the 2011 Trust. The trustees subsequently distributed substantially all of the assets of the 1983 Trust to themselves. They decanted the 1983 Trust without informing husband and without his consent, out of concern that wife would reach the 1983 Trust assets as a result of the divorce action. According to the trustees, the assets were valued at approximately $69 million and comprised securities and hedge and investment funds and entities holding Valvoline franchises. At the time the 1983 Trust was decanted, husband possessed the right to withdraw 75% of the trust property.
The terms of the 1983 Trust would likely have created a divisible property interest because it was a usufructary trustHowever, the 2011 Trust was a spendthrift trust, meaning wife's status as to the trust was that of a creditor, so she had no property interest in that trust. The rights of the trust beneficiaries are generally determined by the law of the governing instrument, but the property division is determined by the law of the divorce tribunal.14 Here, though the Connecticut court had jurisdiction over the divorce, the trust was governed by Massachusetts law. Thus, the Supreme Court of Connecticut certified questions to the Massachusetts Supreme judicial Court. The Massachusetts court held the decanting to be valid. The Connecticut court accepted that ruling and likewise determined the decanting to be valid in the divorce case.
Meanwhile, while the divorce was pending, the trustees brought a declaratory judgment action against husband and wife in Connecticut seeking a declaration that (1) they validly exercised their powers under the 1983 Trust to distribute and assign the property and assets held by them as trustees of the 1983 Trust to the 2011 Trust; and (2) wife had no right, title, or interest, directly or indirectly, in the 2011 Trust. Wife moved for summary judgment, which the court granted. The court ordered restoration of 75% of the assets of the 2011 Trust (as they were held in the 1983 Trust) and an accounting of the 2011 Trust from inception to the date of restoration. It also awarded wife reasonable attorney fees.
A detailed discussion of these opinions follows.
Ferri V. The 2015 Dissolution of Marriage Appeal
In Ferri i,15 wife appealed various financial orders the trial court entered in the dissolution of marriage. The dispositive issue was whether the trial court properly rendered summary judgment in favor of husband on wife's cross complaint on the ground that it failed to plead a legally sufficient cause of action.
In the divorce, wife filed a cross-complaint alleging that husband breached his duty to preserve marital assets during the pendency of their dissolution action by failing to take affirmative steps to contest the decanting of the 1983 Trust. She subsequently filed amended counterclaims alleging claims of common law and statutory fraud, civil conspiracy, breach of fiduciary duty, breach of loyalty, and tortious interference with an expectancy.
The trial court found that husband "did not have a role in creating the 2011 trust or decanting any of the assets from the 1983 trust."16The trial court further found that husband took no action to recover assets when he was informed by his brother about the decanting, noting that husband's reasoning for his inaction was that he "[did] not want to sue his family."17 The trial court ruled favorably on husband's motion for summary judgment, holding that wife failed to state a cause of action.
The trial court's opinion focused on the parties' fiduciary duties. It struck wife's fraud and conspiracy claims, stating "that while marital partners have a...