by Rebecca Klock Schroer
The Colorado Uniform Trust Decanting Act (“Act”) was recently signed by the Governor and it will become effective August 10, 2016. The legislation is large, complex and important for both estate planners and probate litigators.
Decanting allows a trustee to distribute the assets of one trust (“first trust”) to a second trust (“second trust”) under specific circumstances. The Act applies to an irrevocable trust, other than an irrevocable trust held solely for a charitable purpose. Colo. Rev. Stat. § 15-16-903. Decanting is used, among other things, to correct drafting errors, change the situs/governing law of a trust, alter trustee provisions (e.g. trustee succession, create a directed trustee arrangement, reallocate trustee powers), alter powers of appointment, add special needs provisions, and comply with changing tax laws.
The trustee can decant without consent or court approval, except as specifically limited in the Act. Colo. Rev. Stat. § 15-16-907(2). If a trustee plans to decant, the trustee must give notice at least 63 days before the exercise of the power to certain interested persons. Colo. Rev. Stat. § 15-16-907(3). Notice includes, among other things, a full copy of the first and second trust instruments. Colo. Rev. Stat. § 15-16-907(5). The notice requirement does not prevent a person’s right to file with the court and assert that the decanting power is ineffective because it did not comply with the Act, was an abuse of discretion or breach of fiduciary duty. Colo. Rev. Stat. § 15-16-907(7).
The Act contains many restrictions on the power to decant to protect the beneficiaries and avoid potential tax consequences. For example, a beneficiary’s vested interest cannot be reduced or eliminated under the second trust. In addition, the second trust cannot include a new current or remainder beneficiary. Colo. Rev. Stat. § 15-16-911(3). Also, a trustee cannot decant to benefit personally. For example, the second trust cannot have compensation provisions that are more generous than the first trust without beneficiary consent or a court order. Colo. Rev. Stat. § 15-16-916. Many of the tax related limitations are included in Colo. Rev. Stat. § 15-16-919, including provisions related to retirement accounts and grantor trust powers.
Estate planners should discuss the Act with their clients to make sure that their client’s intent is properly reflected. A settlor needs to understand that his or her trust may be subject to decanting. The Act also addresses the concerns of a settlor that does not want an irrevocable trust to be subject to decanting. If the governing instrument prohibits or restricts decanting, then the terms of the governing instrument control. Colo. Rev. Stat. § 15-16-903.
Litigation cases will likely arise as a result of the Act. The Act imposes fiduciary duties on the trustee when decanting. Accordingly, prior to decanting, a trustee should have a very good basis for his or her decision. Specifically, the Act states that the trustee has the “duty to act in accordance with the purposes of the first trust.” Colo. Rev. Stat. § 15-16-904. The Act exempts the trustee, however, from a duty to exercise the decanting power or inform the beneficiaries about the applicability of the Act. Colo. Rev. Stat. § 15-16-904(2).
A trustee does have the option of filing a petition for instructions to have the court determine whether the proposed exercise of the decanting power is consistent with the trustee’s fiduciary duties. Colo. Rev. Stat. § 15-16-909.
A link to the entire text of the Act can be found here.