Trusts - trustee's decanting power derived from irrevocable trust language - Morse v. Kraft.

• Author: Bagley, Ian

Trusts--Trustee's Decanting Power Derived from Irrevocable Trust Language--Morse v. Kraft, 992 N.E.2d 1021 (Mass. 2013)

A trustee's discretion is generally constrained by statute, by the terms of the trust, and by the trustee's fiduciary duty to act in the beneficiaries' interests. (1) When a trustee, acting within the scope of that discretion, distributes trust property into a new trust, that distribution is called "decanting." (2) In Morse v. Kraft, (3) the Massachusetts Supreme Judicial Court (SJC) considered whether the broad discretion afforded to a trustee under the terms of an irrevocable trust included the power to decant. (4) Holding that it did, the SJC nevertheless declined to adopt the Boston Bar Association's (BBA's) preferred position that such power is inherent in all trustees of irrevocable trusts. (5)

In 1982, the Kraft Irrevocable Family Trust (1982 Trust) was established for the benefit of Robert and Myra Kraft's four sons. (6) The 1982 Trust contained four subtrusts, each for the benefit of one of the four sons. (7) Robert and Myra Kraft's grandchildren were the contingent remainder beneficiaries of these subtrusts. (8) The 1982 Trust prohibited the sons from serving as disinterested trustees and making decisions regarding distributions. (9) The sons' powers were so limited because in 1982 the sons were minors and "it was impossible to know whether they would develop the skills and judgment necessary to make distribution decisions concerning their respective subtrusts." (10)

By 2012, the sons were adults and Robert Morse, who had served as Trustee for about thirty years, was approaching retirement. (11) Believing the sons were now well-qualified to manage the trust assets themselves, Morse determined that it would be in the beneficiaries' best interests for all of the 1982 Trust assets to be transferred to a new trust under which the sons could exercise control over distributions from their subtrusts. (12) Morse was concerned, however, that such a transfer might trigger the application of a particular tax--the generation-skipping transfer (GST) tax--potentially resulting in substantial adverse tax consequences for the beneficiaries. (13) As it stood, the GST did not apply to the 1982 Trust because the law contained a "grandfather" provision exempting trusts that were irrevocable as of September 25, 1985 and not subsequently altered. (14) Whether this tax would apply to the proposed new trust depended on whether the 1982 Trust gave Morse the authority to make his proposed transfer without first obtaining consent from the court or the beneficiaries. (15)

On April 23, 2012, Morse filed an action for declaratory relief before a single justice of SJC seeking clarification as to whether the 1982 Trust permitted Morse to make the transfer he envisioned without the beneficiaries' or the court's consent. (16) The single justice reserved Morse's action, reporting it for the consideration of the full court. (17) The SJC concluded that Morse did have the authority to make the proposed transfer. (18)

In 1992, New York became the first state to enact a statute expressly authorizing decanting. (19) More than a half-century before the arrival of New York's statute, however, the Supreme Court of Florida confronted the issue in Phipps v. Palm Beach Trust Co.,20 holding that a trustee granted "sole and absolute" discretion to distribute trust assets to beneficiaries is also empowered to distribute those assets into a new trust. (21) Cases in Iowa and New Jersey have yielded similar outcomes. (22)

Of the twenty-plus states that have followed New York's lead in enacting decanting statutes, fourteen have done so within the past five years. (23) These statutes vary in the degree of discretion they grant to trustees to decant various types of trusts. (24) The arrival of these statutes and a corresponding surge in the popularity of decanting has prompted the U.S. Internal Revenue Service to solicit comments regarding how various tax laws should be applied to these transfers. (25)

In 1986, the United States Congress enacted the current version of the GST, which imposes a tax on transfers of wealth that skip a generation. (26) The GST's purpose was to close a loophole that enabled a taxpayer to avoid paying estate and gift taxes by placing his or her assets in trust. (27) The effect of doing so was to allow a donor's children to benefit from the trust assets during their lifetimes without paying any transfer taxes; ownership would then pass to the remainder beneficiaries--the donor's grandchildren, for example--after the children's deaths. (28) The GST closed this loophole by taxing transfers that "skip" a generation. (29)

In Morse v. Kraft, the SJC acknowledged that a power to decant is effectively a power to amend an irrevocable trust. (30) In assessing whether decanting was proper in this instance, the SJC interpreted the language of the 1982 Trust granting the trustee broad, "almost unlimited discretion" to distribute property for the beneficiaries' benefit. (31) The SJC held that the grantor intended to empower the trustee to distribute trust property into further trust for those same beneficiaries. (32) As the 1982 Trust excluded beneficiaries from participating in distribution decisions while also empowering the trustee to decant, the SJC concluded that the trustee could proceed with the proposed decanting without obtaining approval of either the court or the beneficiaries. (33)

An amicus brief submitted by the BBA urged the SJC to seize this opportunity to hold that trustees inherently possess the authority to decant. (34) Noting that a number of states have enacted decanting statutes, the SJC opted not to adopt the BBA's position, suggesting it might be better for the Massachusetts legislature to consider its own statute. (35) The SJC also left open the possibility that, in interpreting future trusts, it might eventually view the absence of a provision expressly authorizing decanting as evidence that the grantor did not intend to grant such authority. (36)

As more states enact decanting statutes, some practitioners and commentators have voiced concerns...