A revised Florida statute permits decanting for more types of trusts. Unlike the decanting of wine, pouring wine from one container to another container, decanting, for legal purpose, is “pouring” assets from one trust to another, instead of distributing assets directly to a beneficiary. Also see a discussion in a prior blog.
Decanting was first approved in a Florida Supreme Court (the “Court”) case, Phipps v. Palm Beach Trust Company in 1940. The trust permitted a trustee, in the trustee’s sole discretion, to transfer any part of the trust assets to Mrs. Phipps’ children and their descendants. The trustee advised the corporate trustee to transfer the assets into a new trust with income being payable to the wife of one of the descendants, if the descendant provided for same in his will. While not called “decanting”, the Court concluded that “the power vested in a trustee to create an estate in fee includes the power to create or appoint any estate less than a fee unless the donor clearly indicates a contrary intent”. The Court upheld the exercise because the second trust did not include anyone who was not a beneficiary of the first trust.
In 2007, the Florida Legislature codified the Phipps case in Section 736. 04117 of the Florida Statutes. The statute required that a trustee have absolute discretion to invade principal of the trust. An issue for practitioners is that many trusts provide that the trustee has the ability to invade principal for health, education, maintenance and support (the “HEMS” standard). The HEMS standard has favorable estate tax consequences. Thus, practitioners could not use the decanting statute for these HEMS standard trusts. If decanting authority was not already in the trust, practitioners had to rely on the Phipps case for decanting authority.
As other states and the Uniform Trust Decanting Act have liberalized certain requirements of decanting, the Florida legislature amended the statute to provide for decanting for those trusts authorizing trustees to distribute assets subject to the HEMS standard. Definitions are clearly stated and there is also a section on decanting to a supplemental needs trust. This latter provision is very helpful if a beneficiary becomes disabled after a trust is created.
If a trustee has the power to distribute income and principal under a HEMS standard, then the statute sets forth the following requirements to decant.
The second trust must grant each beneficiary of the first trust”substantially similar interests” in the second trust. “Substantially similar interest” is defined in the statute.
If the first trust grants a power of appointment (“POA”) to the beneficiary of the first trust, then the second trust must grant such a POA to the beneficiary of the second trust and the class of appointees must be the same.
If no POA is granted in the first trust, then the second trust can not grant a POA (but see 4 below for an exception).
The term of the second trust may extend beyond the time frame of the first trust. During the extended time, the trust terms may include language for a trustee to distribute under an absolute power (not limited to the HEMS standard). During this extended time, the trustee can also create a POA (notwithstanding 3) if the power holder is a current beneficiary of the first trust.
The provision under 4 may be helpful if the trustee of the first trust can distribute pursuant to a HEMS standard and must make outright distributions at certain ages, such as 25, 30 and 35. If the trustee wants to extend the time of the trust for the beneficiaries’ lifetime, then until the required ages in the first trust, the beneficiaries’ interests must be “substantially similar” to the first trust but after age 35, the trustee may be granted absolute discretionary authority.
The revised decanting statute also includes notice requirements and certain distributions which are prohibited, primarily those that will affect a federal tax benefit, exclusion or deduction which was originally claimed or could have been been claimed.
ADVICE: Decanting is another “arsenal” in estate planning which can be used to “fix” trusts that have terms that may be outdated or do not take into account the changing lives of the beneficiaries. Decanting is also an alternative to avoid court proceedings as a trust decanting is a trustee exercising their rights to make distributions. All tax issues should be reviewed prior to decanting.
WORD OF THE WEEK: Grandfathered GSTT Trust. While most all think fondly of our grandfathers, practitioners and clients should also think fondly of a grandfathered GSTT trust. Remember that the GSTT is a generation skipping transfer tax (an additional tax of 40% on gifts to grandchildren!). The GSTT was enacted by Congress in 1986, and it is not applicable to trusts that were irrevocable and in existence on September 25, 1985 (the date on which the 1986 legislation was first introduced in Congress). Trusts in existence before this date are said to be “grandfathered” from the GSTT. If a trust is “grandfathered” then there is NO GSTT imposed unless certain modifications are made to the trust. Thus, if you have an old and cold GSTT trust be sure to do NOTHING that could jeopardize the grandfathering of that trust or you could have an explosive tax event on your hands!
GENEROSITY IS A KEY TO HAPPINESS…REACH OUT AND HELP SOMEONE TODAY! 😎