The irrevocable trust is a powerful protection tool. If written properly by an experienced estate planning attorney, it can secure your wealth and property for intended loved ones for generations to come.
But you can’t anticipate everything – including whether an heir will divorce and possibly expose a large portion of trust assets to an unexpected division.
To further strengthen a trust, it’s worth considering whether you may want to grant your trustees authorization to take “any action necessary,” including decanting, to protect a trust’s assets.
“Decanting” is the act of a trustee transferring the assets of one trust into another trust. It is essentially a “do over” – whereas the assets inside an existing trust (with less favorable terms) are placed inside a new trust (with more favorable terms).
Mass Effect
Several financial news and estate planning associations are reporting on a recent decision by the Massachusetts Supreme Court (Ferri v. Powell-Ferri, SJC-12070).
The high court held that the trustees of an irrevocable trust created in 1983 could decant the trust’s assets into a new trust even though, at the time of the decanting, the beneficiary, who was going through a divorce, had the right to withdraw 75 percent of the trust property.
The trustees in the Ferri case apparently decanted the assets without the knowledge of one of the beneficiaries to protect the funds from his soon-to-be ex-wife, according to an article published by WealthManagement.com.
The ex-wife had a problem with that, obviously, and filed a lawsuit to reverse the decanting.
While this case was ultimately decided under Massachusetts law, we’re bringing it to your attention because it may become a reference point in rulings made by courts in other jurisdictions, especially those without statutes regarding decanting, and because it’s one of a small number of rulings regarding decanting.
Currently, about half of the nation’s states carry decanting statutes. Partners Financial has compiled an informative PDF document that notes which states require a notice to beneficiaries.
Lessons to Learn
There are several lessons we can take from this case:
The court’s decision refers to a trustee’s affirmative “duty to decant if the trustee deemed decanting to be in the beneficiary’s best interest.” This duty could apply in other creditor protection scenarios, WealthManagement.com reported.
When new clients ask our firm to create a trust requiring an outright distribution to a beneficiary at a certain age, we often advise them to instead consider granting the beneficiary a withdrawal right. The beneficiary can then refrain from exercising his or her withdrawal right to maintain at least some level of creditor protection.
Of course, a trust that grants no withdrawal rights offers even better protection. But every family is different, and there is no single solution for everyone.
When you are open to the possibility of future changes to a trust to protect the assets inside it, then decanting can be included as permitted in the language of the original trust. But if you are intensely serious about the restrictions you want in place, then it’s important to include a provision prohibiting any decanting.
If you want to protect assets for loved ones and have concerns about a beneficiary’s future creditors – or even a possible divorce – contact our office for a consultation.