A jug of wine, a living trust, and thou
December 1, 2018
I’m not much of an oenophile. Occasionally I might enjoy a nice glass of wine with certain foods, but I can’t tell the difference between a Merlot and a Bordeaux.
But despite my lack of sophistication in matters of the grape, I think about decanting quite a bit.
To a wine connoisseur, decanting means pouring wine from one container to another. It is done either to remove sediment from the wine, or to let the wine breathe before drinking. But to an estate planner, decanting means something very different: it means moving assets from one trust to a different trust.
When the trust is revocable – like your typical family living trust – this is not controversial. If I create a living trust for myself and my family, and then later I want to put some of those assets into a different trust, I am free to do that.
When the trust is irrevocable, though, this is very controversial.
An irrevocable trust is supposed to be locked in place. When a trust is “irrevocable” it is by definition “non-amendable”. For whatever reason, the creator of the trust has decided to set the terms of that trust in stone. But when you decant a trust, moving the assets to a different trust with, presumably, different terms, you have effectively amended the trust. Maybe not officially (since the old trust still has the same rules), but practically, because the assets are now subject to a different set of rules in the new trust. So as a general rule, you can’t decant an irrevocable trust, because that would be the same as amending a trust that you’re not supposed to be able to amend.
Nonetheless, Alaska law allows for irrevocable trusts to be decanted, but only by a judge, and only in certain circumstances. It can be done when there are unanticipated circumstances (unanticipated by the creator of the trust, that is). It can happen when there was a mistake in drafting the trust. Or when the tax laws have changed, so that the old terms are now inconsistent with the tax objectives of the trust. Or when all beneficiaries agree to the change, and the judge finds that the proposed change is consistent with the purposes of the trust.
That’s a lot of options. But there are two consistent requirements for any of these changes: a judge has to make the change, and it has to be consistent with the intent of the trust’s creator.
That makes sense, doesn’t it?
But it isn’t enough for some estate planners. Last year, a group of them pushed a bill in the Alaska legislature, which could have radically changed those rules. The bill would have made it possible for the trustee to change the terms, even when the trust documents didn’t say that the trustee could do that.
The trustee is just the manager of the trust. The “grantor” or “settlor” creates the trust and sets the rules, and the “beneficiaries” are the people who are supposed to benefit from the trust (by getting money from the trust). The trustee follows the rules that the grantor established, for the benefit of the beneficiaries. The trustee isn’t supposed to be able to set or alter the rules, that’s the grantor’s prerogative.
Even more problematical: This bill would apply to trusts that have already been created, by creating a presumption that the trustee can change the rules, unless the document says otherwise. But of course, none of these documents say otherwise, because it was never the rule that a trustee could change the rules of the trust.
It’s as if you hired someone to paint your house, and then before the job was done, the legislature passed a law that said that unless the contract specifically says that the painter can’t change the color to banana yellow, the contractor has the right to paint the house banana yellow. But of course the contract doesn’t mention banana yellow, it just says they’re going to paint it gray.
Why did they try to do this? Most of the proponents of the bill were very high-end estate planners, who had put many of their clients into irrevocable trusts for estate tax reasons. Now the estate tax only applies to estates over $11 million, thanks to the Tax Cuts and Jobs Act last December. Because of the change, a lot of those high-end clients are doubtless sore at their attorneys for putting them into
restricted arrangements that they no longer need. Dramatically liberalizing the decanting rules would please a lot of those clients.
But trusts are made irrevocable for a lot of different reasons. You might make an irrevocable trust because you are in a blended family and don’t want your surviving spouse to be able to disinherit your children from your first marriage. Or perhaps you are concerned your heirs might blow the money. Or maybe you want to make sure the family homestead is held for future generations. Or you may be concerned about what happens if you develop dementia. You might be worried about one of your kids getting divorced and your ex-child-in-law taking the inheritance. Perhaps you made the trust so that nursing home costs won’t eat up all your assets, or because you are concerned about future liabilities in our sue-happy culture. There are lots of reasons you might create an irrevocable trust, not just taxes.
Irrevocable trusts are made irrevocable for a variety of reasons, and generally for good ones. Changing the rules, and making the rule changes apply retroactively, can totally frustrate the intent of the person who created the trust. And after all, it was his or her assets that funded the trust in the first place.
I opposed the bill and, unless somebody convinces me that the benefit of letting trustees freely amend irrevocable trusts outweighs the negatives, I will oppose it next year. It didn’t pass this time, and it’s not a bill that should pass.
And you can drink to that.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. Clink!