If a revocable trust is one that may be fully amended or revised in any way, then an irrevocable trust must be one that cannot be amended or revised in any way, right? Not necessarily. Most estate planning and elder law attorneys know this because it is not uncommon to face the scenario of what, if anything, can be done to address changes in circumstances or law after a trust becomes irrevocable. For decades, practitioners have relied upon common law and statutory trust modification to solve the problems that arise when unexpected changes occur. (1) As the saying goes, if all you have is a hammer, everything looks like a nail. (2) But perhaps there is a sexier tool in the practitioner's toolbox, and it has recently had a makeover in Florida. This tool is decanting.
In part I of this article, I review the evolution of trust decanting in Florida and discuss the recent changes to Florida's decanting statute, focusing in particular on one of the biggest changes to the statute, decanting to a supplemental needs trust. In part II of this article, I dissect the mechanics of trust decanting and explore decanting's utility, again with particular emphasis on decanting's effect on a trust beneficiary with special needs.
What Is Decanting?
In contrast to trust modification (and reformation, for that matter), (3) decanting is viewed as an extension of a trustee's power to distribute trust assets. (4) Whereas modification, by virtue of being an amendment to existing trust language, works within the parameters of the existing trust instrument, decanting is a process that shifts trust corpus from one trust instrument to another. Think of the process of decanting wine: Wine is poured from a bottle to a decanter to allow it to breathe and mature. While the wine decanter or vessel changes, the wine itself--the trust corpus--remains the same, conforming and molding itself according to the parameters of the new decanter. This is the same for trust decanting.
Because of its flexibility and usefulness, decanting provides unique opportunities to remedy problems in trust administration or address changes in circumstances or law. It can be used to achieve certain tax objectives, change trust situs, expand or limit trustee powers, restrict beneficiaries' rights to information, provide better asset protection by modifying spendthrift provisions, correct drafting errors, split or consolidate trusts, change beneficiaries through powers of appointment, provide nonjudicial avenues for ensuring trustee succession over time, and alter distributions to include special needs provisions. Given the right set of circumstances, the application of decanting can seem limitless.
Evolution of Decanting
Decanting is not new; it has evolved over time. While Florida has recognized a trustee's common law authority to decant since 1940 with the case of Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940), many state courts to date have not specifically addressed a trustee's authority to decant. State legislatures, however, began addressing a trustee's authority to decant in 1992, when the first decanting statute was passed in New York. (5) Since then, approximately half of all state legislatures (and growing each year) have enacted state statutes authorizing decanting, including Florida in 2007 with the passage of [section]736.04117 as part of the Florida Trust Code. (6) While decanting statutes vary widely from state to state, the underlying rationale is that if a trustee has discretionary power to distribute trust corpus to beneficiaries, this power constitutes a special power of appointment that enables the trustee to distribute trust corpus to a different trust for the benefit of the beneficiaries rather than directly to the beneficiaries themselves. (7)
As originally adopted, [section]736.04117 provided that a trustee with absolute power to invade principal of a trust to make distributions to one or more beneficiaries could exercise that power by appointing all or part of the trust principal subject to that power to the trustee of another trust for the benefit of one or more of the beneficiaries, so long as the beneficiaries of the second trust included only the beneficiaries of the first trust; the second trust did not reduce any fixed income, annuity, or unitrust interest in the trust assets; and the second trust did not interfere with any marital or charitable deduction taken by the first trust. (8) An "absolute power to invade principal" was defined as one that was not limited to a specific or ascertainable purpose, such as health, education, maintenance, and support, commonly referred to as "HEMS" or "ascertainable standard." (9) For example, a trustee whose power to distribute principal was limited only by a more subjective standard, such as the beneficiary's "best interests" or "happiness," had an absolute power to invade principal. Many trusts do not grant a trustee such unfettered discretion, so many trusts were not candidates for decanting under [section]736.04117 as originally adopted.
For more than a decade [section]736.04117 remained unchanged, and, compared to other decanting statutes, it seemed relatively conservative. As of July 1, 2018, however, [section]736.04117 has been overhauled so that it is more in line with other states' decanting statutes and the Uniform Trust Decanting Act. (10) The result is a much broader opportunity to decant Florida trusts and, thus, affect meaningful changes in irrevocable trust administrations.
Florida's Current Decanting Statute
Under the revised [section]736.04117, decanting powers are granted to an "authorized trustee," who is any trustee, other than the settlor or a beneficiary, with the power to invade trust principal. (11) Thus, a settlor who creates an irrevocable trust for the benefit of his or her living descendants with himself or herself as sole trustee is not an authorized trustee and, thus, may not decant. (12) That trustee, however, may be able to modify the trust or utilize existing trust provisions to appoint an additional trustee who qualifies as an authorized trustee who could decant. (13)
Similarly, a trustee who is also a trust beneficiary is not an authorized trustee (and, thus, may not decant) as to those portions of the trust held for his or her benefit, regardless of the extent of his or her power as trustee to invade principal. (14) However, if the trust were held for the benefit of several permissible beneficiaries, the trustee might be able to sever the trust into separate trusts and decant the severed trusts not held for his or her benefit, thereby effectively transforming himself or herself into an authorized trustee as to at least a portion of the first trust.
In order to decant, the power to distribute must be over principal; a power to distribute...