Trustees are legally obligated to act in the best interests of beneficiaries. In some circumstances, this fiduciary duty might oblige the trustee to decant the trust; if the trust document does not clearly provide for decanting, the trustee must determine whether they have authority to decant the trust. Trust modification via decanting allows assets of an existing trust to pass to a new trust with more favorable terms.
Ferri v. Powell-Ferri Case
A recent case regarding the decanting of an irrevocable trust highlights the court’s opinion on whether the trustee’s authority extended to decanting the trust. Ferri v. Powell-Ferri
involved a Connecticut court’s interpretation of Massachusetts law. While these are two states TrustCounsel does not practice in, it is helpful to review the case as it might influence the interpretation of similar situations by courts in alternate jurisdictions. It is important to note that this decision was rendered in a jurisdiction that does not provide for decanting by statute.Ferri v. Powell-Ferri concerned a trust beneficiary who was involved in divorce proceedings. The trust was originally established in the 1983. The trustees, whose fiduciary duty requires them to manage the trust responsibly and in the best interest of the beneficiaries, decanted the trust in 2011 to prevent trust assets from being compromised by the divorce proceedings. The trustees decanted the trust without consent from or notice to the beneficiary. The 2011 trust included a spendthrift provision that limited the beneficiary’s ability to transfer his interest in the trust assets and eliminated the beneficiary’s vested withdrawal rights. In the original trust, the beneficiary was permitted to request withdrawal of up to 75 percent of the principal at the time of the trust decanting; this right increased to 100 percent under the terms of the original trust while the litigation was pending. This change of withdrawal rights prompted the beneficiary to file suit.
Through subsequent judgments and litigation, the trustees produced an affidavit from the grantor that stated the trustee had “specific authority” to use whatever means necessary to protect the trust assets with the best interest of the beneficiary in mind. Ultimately, the recent ruling suggests trustees have a duty to decant in order to protect trust assets where doing so is consistent with the overall trust terms. The judge determined “the authority to decant would be…contingent upon a very broad discretion on the part of a trustee.” The decision further explicitly refers to the trustee’s “duty to decant if the trustee deemed decanting to be in the beneficiary’s best interest.”
Modifying Irrevocable Trusts
Decanting is one of many methods used to modify irrevocable trusts. While it is not permitted in all states, nearly half of the United States have decanting statutes in place. If the trust is in a jurisdiction lacking decanting statutes, the trustee could move the trust to an area that provides for such. Other methods of modification involve action by a trust protector or a non-judicial settlement agreement. The latter is not available in all states.
While the Ferri case highlights how broad powers granted to trustees may authorize and, in certain circumstances, make it their duty to decant the trust, it only analyzed decanting and did not speak to other trust modification methods. It remains to be seen if cases involving other trust modification methods would yield similar analysis by the court.
Before a trustee moves forward with trust modification, many factors should be considered: pending legislation, tax implications, discovery of errors, and life changes affecting beneficiaries, such as the divorce proceedings in the case above. Learn more about trust modification.