Effective August 10, 2016, the Colorado legislature enacted C.R.S. § 15-16-901 et seq., the Colorado Uniform Trust Decanting Act (the “Act”). “Decanting” generally refers to the distribution of trust property from one trust to another trust pursuant to a trustee’s discretionary power to make distributions for beneficiaries. New York was the first state to enact a trust decanting statute in 1992; now, nearly half of the states, including Colorado, have specific statutes addressing and authorizing trust decanting in various forms.
Trust decanting is useful for tax planning, dealing with changes in applicable law, or making changes to the administration of a trust after it has become irrevocable. Before the availability of the Act, trustees in Colorado and other states without specific trust decanting statutes had to rely on specific language in a trust authorizing the trustee to distribute assets to or for the benefit of one or more beneficiaries, the common law principle of power of appointment, or the order of a court modifying the trust. None of these options were particularly simple or cost-effective, and often put the trustee in the position of acting without a solid legal basis, which potentially invited liability.
Decanting under the Act is far simpler and easier: it does not require court approval, it lays out clear guidelines as to which trust provisions and beneficiary interests may be changed, and it provides an easy-to-follow procedure for effecting the decanting. There are certain limitations: decanting is not available for irrevocable charitable trusts, or for trusts not subject to Colorado law. In decanting a trust, the trustee also must act “in accordance with the purposes of the first [original] trust”, which means that a trustee cannot go against the intent of the person who formed the original trust, or act inconsistently with the purposes of a trust to be decanted into a new trust.
The Act refers to two levels of trustee discretion over distributions of original trust assets. The first level is “expanded distributive discretion”, that is, the discretionary power to distribute trust assets to beneficiaries which are not limited to an ascertainable standard (usually health, education, maintenance, and support) or a reasonably definite standard. If the trustee has this level of unlimited discretionary distribution, the trustee can change beneficial interests in the new trust. This is a very broad power; however, the trustee cannot add beneficiaries to the new trust, or eliminate a current beneficiary’s vested interest.
The second level of trustee discretion is “limited distributive discretion”, which means that the trustee does not have unlimited powers, but must distribute trust assets for limited ascertainable standards of health, education, maintenance, or support, or subject to other clear standards or limitations. A trustee with limited distributive discretion may decant an original trust into a new trust, but the new trust “must grant each beneficiary of the first trust beneficial interests which are substantially similar to the beneficial interests of the beneficiary in the first trust.” Practically speaking, this means that the trustee may decant to change administrative provisions, but cannot make material changes to the dispositive provisions of the original trust.
The Act, of course, prohibits trustees from making changes to a trust to benefit themselves, such as increasing the trustee’s compensation above what is already authorized without beneficiary permission or expanding limitations on the trustee’s liability.
The procedure for decanting is relatively simple. The trustee first would determine whether to simply modify the original trust or to prepare an entirely new trust to receive decanted assets, and would have a new trust agreement prepared. The trustee must provide formal notice to the settlor, current beneficiaries, and other trustees or fiduciaries, with a description of the details of the decanting. After a 63 day notice period (which may be waived by the persons receiving notice), the trustee would exercise the decanting power in a signed record identifying the original trust, the new trust, the assets being distributed to the new trust, and the assets, if any, remaining in the original trust.
The Act also allows decanting in certain special circumstances. A trustee may decant into a special needs trust, which is very useful if a beneficiary of a standard irrevocable trust becomes disabled and would qualify for government benefits. This type of decanting must “further the purposes of the first trust”, which means that the trustee cannot use the Act to create a special needs trust with substantially different purposes than the original trust. The trustee may also decant an animal trust which has a designated “protector” (a person with authority to enforce the trust on behalf of the beneficiary animal), with the permission of the protector. Finally, a trust that has some charitable interests, but is not entirely charitable, may be decanted, with certain limitations.
The Act provides certainty, structure, and a number of useful options for trustees of Colorado irrevocable trusts, and is a welcome addition for tax and estate practitioners.