April 2025
Gene M. Carlino, Esq.
Pannone Lopes Devereaux &O'Gara, LLC Providence
"If decanting is desired, ideally the ability to do so and the scope of its use will be spelled out in the governing instrument."
I. Introduction—Sometimes a bottle of wine can be improved by decanting.
Decanting, whether through statutory authority or under the terms of the trust instrument, is a popular mechanism to address changed circumstances or less-than-ideal planning. The ability to address a number of different circumstances not dealt with adequately under the governing instrument, such as tax planning, special needs planning and creditor protection, provides another tool in the planner's toolbox to address these situations. In the creditor protection arena, great care must be taken if the decanting is to be successful and for the planner to avoid embroiling himself or herself in the controversy.
Decanting completed without invoking the aid of a state statute relies on the authority contained within the trust instrument as executed, while decanting under a state statute relies on the instrument containing sufficient breadth to comply with the particular state's decanting statute. Often this breadth is minimal, such as simply having the authority to distribute principal. [1]
Attacks on decanting come in two forms. For non-statutory decanting, the issue in the first instance is whether decanting is authorized under the terms of the instrument and, secondly, if so, whether the decanting go too far. Attacks on instruments decanted pursuant to a state statute focus on whether the decanting violated the rights of a class of individuals described within the statute, often referred to as exception creditors, or if the decanting itself was effectuated in a manner that violated a creditor's rights.
II. A. Authority in the Instrument — Is the wine good in the first place.
If decanting is desired, ideally the ability to do so and the scope of its use will be spelled out in the governing instrument. A specific provision may exist in the governing instrument authorizing decanting.[2] Conversely, if there is a prohibition on decanting in the instrument, decanting should not be used.
Decanting based on the instrument, when not expressly authorized, comes down to the age-old adage of effectuating settlor intent. Can it be gleaned from the four corners of the document that decanting was intended by the settlor? If not, an ambiguity more than likely exists within the document and extrinsic evidence should be considered.[3] The existence of phrases such as "to or for the benefit of" are pointed to as supporting a trustee's authorization to decant. Language such as "income and principal may be distributed in equal amounts either outright or in further trust without regard to the effect on the remaindermen" is helpful. Some courts have rationalized that the ability to make an outright distribution includes by its nature the ability to give something less, including a beneficial interest in trust with spendthrift protection.[4]
B. Authority under State Statute
A majority of the states now have decanting statutes. When decanting pursuant to statute, strict adherence to the requirements of the statute is critical. The following areas must be examined.
• Is notice to beneficiaries required?
• If the original trust has an ascertainable standard can the new trust be a purely discretionary trust?
• Can a mandatory income interest be removed?
• Can the new trust contain a power of appointment that can be exercised in favor of persons who are not beneficiaries of the existing trust?
• Can a remainder beneficiary's interest be accelerated?
• Should you give notice to existing creditors?
If the new trust, often referred to as trust number 2...
