If you’re working with an irrevocable trust that needs fixing for some reason and the trust agreement includes an “absolute” power to invade trust principal, your first thought should be to simply re-write the trust by using Florida’s “decanting” statute (F.S. 736.04117).
Decanting lets trustees re-write irrevocable trust agreements by figuratively pouring the assets from an old trust into a new one. Under Florida’s decanting statute, an “absolute” power to invade principal means a power that’s not limited to specific or ascertainable purposes, such as health, education, maintenance, and support (“HEMS”), whether or not the term “absolute” is used.
Decanting is all the rage in estate planning circles, as it should be: it’s a legislatively-sanctioned way to privately re-write an irrevocable trust without going through the costs and delays inherent to a judicial modification proceeding. (Yes, this all gets done out of court.) For a solid general introduction to decanting you’ll want to read Decanting is Not Just for Sommeliers, recently co-authored by Texas law prof. Gerry W. Beyer. Here’s an excerpt:
Times change, needs change, and laws change thus giving a trustee motivation to decant. Examples of reasons to decant include to:
- Correct a drafting mistake;
- Clarify ambiguities in the trust agreement;
- Correct trust provisions, due to mistake of law or fact, to conform to the grantor’s intent;
- Update trust provisions to include changes in the law, including new trustee powers;
- Change situs of trust administration for administrative provisions or tax savings;
- Combine trusts for efficiency;
- Allow for appointment or removal of trustee without court approval;
- Allow for appointment of a special trustee for a limited time or purpose;
- Change trustee powers, such as investment options;
- Transfer assets to a special needs trust;
- Adapt to changed circumstances of beneficiary, such as substance abuse and creditor or marital issues, including modifying distribution provisions to delay distribution of trust assets;
- Add a spendthrift provision;
- Divide a “pot trust” into separate share trusts;
- Partition of trust for marital deduction or generation-skipping (GST) transfer tax planning.
In trusts and estates circles, you know you’re on to a good thing when an idea’s codified by lots of state legislatures, which is exactly what’s happened with decanting. In 1992 New York became the first state to enact a decanting statute. As of 2014, at least 22 states have followed suit (including Florida). For more on how to navigate Florida’s particular brand of trust-decanting statute you’ll want to read Fixing Old Trusts and Exploiting New Opportunities: Florida’s Decanting Statute by Boca Raton attorney Thomas Katz.
And last but not least, before you pull the trigger on one of these transactions you’ll want to do a deep dive into all the potential tax traps that seem to bedevil estate planners at every turn. Don’t count on a PLR for cover; the IRS recently issued Rev. Proc. 2014-3, which placed decanting on its “no-ruling” list for most of the income, gift, and GST-tax issues you’d be interested in. Pending IRS guidance and case law developments, to wrap your arms around the possible tax effects of a decanting you’ll want to read An Analysis of the Tax Effects of Decanting, co-authored by tax super star Jonathan Blattmachr.