Many states provide tools for changing an “irrevocable” trust, and with the enactment of the Maryland Trust Decanting Act, Maryland lawmakers have provided another tool to improve irrevocable trusts in Maryland, but not without limitations.
I. What does it mean to “decant”?
Just as one might filter out impurities in wine via decanting, a trustee may correct errors or omit problematic trust terms by decanting (or distributing) assets of an existing trust (the “first trust”) to one or more new trusts with different, more favorable terms (the “second trust”). Trust decanting may be expressly authorized in the trust instrument or by state statute.
After the second trust, having the preferred terms, has been established by agreement or declaration, the trustee will direct that the assets be decanted from the first trust and distributed to the second trust. Thereafter, the decanted trust assets will be governed by the terms of the second trust only.
The grantor/settlor/creator of the first trust does not participate in the act of decanting. Neither do the beneficiaries. Only the trustee (or other authorized fiduciary) can decant a trust.
II. When might a trustee want to decant a trust?
Depending on the scope of the trust language or state statute, trust decanting can serve as a very useful tool to address trust problems or administrative inflexibilities, such as:
• Correcting drafting errors or ambiguities;
• Changing the situs of a trust;
• Changing the succession of trustees;
• Changing the investment standard for trust assets;
• Changing the standard of distribution and/or removing mandatory distributions or beneficiary withdrawal rights;
• Adding language to permit a trust to hold S corporation stock; and
• Changing a trust to a third-party special needs trust.
III. Alternative Ways to Change the Terms of an Irrevocable Trust
The Maryland Trust Decanting Act provides one additional tool to address select trust problems; however, the statutory decanting power may not
always be the best tool available.
Express Trust Terms. Many trusts contain language allowing the trustee to change the situs of a trust, divide a trust into one or more shares, or grant a trust beneficiary the power to change the ultimate disposition of the assets of a trust (i.e., a general testamentary power of appointment). In addition, trusts may contain an express decanting power; indeed, when expressly included in a trust instrument, the trust decanting power typically is not limited by the same restrictions found in the Maryland Trust Decanting Act, thereby potentially allowing for broader application of the power.
Court Modification. Maryland law provides that a noncharitable irrevocable trust can be modified upon the consent of the trustee and all beneficiaries of the trust if a court concludes that the modification is not inconsistent with a material purpose of the trust. Judicial modification may be the best route when the trustee or one of the beneficiaries wishes to obtain the court’s approval with regard to a modification. A court may also modify irrevocable trusts for other reasons (whether or not the trustee and all beneficiaries consent), including (i) to further the intended purposes of a trust by addressing circumstances unanticipated by the grantor of the trust, (ii) to avoid continued impracticable or wasteful administration of a trust, and (iii) to achieve the tax objectives of the grantor.
Nonjudicial Settlement Agreement. Maryland law also allows interested persons to enter into a binding nonjudicial settlement agreement with respect to matters involving a trust, to the extent that the settlement does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by a court. “Interested persons” are defined as those whose consent would be required in order to achieve a binding settlement if it were to be approved by a court.
Whatever the tool used to adapt an irrevocable trust, it is important to discuss its intended use with estate planning counsel, and to employ it with an eye to precision rather than renovation.
