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Decanting: It’s Not Just for Fine Wines Anymore

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JUNE 20, 2011 VOLUME 18 NUMBER 22
Imagine this tragic scenario: your 33-year-old son has a serious illness, and requires extensive medical treatment. The good news is that the treatment may well effect a cure. The bad news is that it will be horribly expensive. Right now he qualifies for government assistance with that expense — after all, he hasn’t been able to work for several years. But that eligibility is about to change.

Your mother set up a trust for each of her grandchildren before her death five years ago. Each trust provided that the grandchild would receive his or her share outright at age 35. In two years, your son will be eligible to receive about $250,000 from his trust — and you think it will probably be spent immediately on medical care that otherwise would be provided at no cost to him.

Arizona (and a number of other states — but we’re not in the business of giving advice regarding state laws we don’t know about) now allows the trustee to do something about your son’s problem. It is possible to “decant” an irrevocable Arizona trust into a new trust, so long as a few basic principles are not violated. The new trust could, for example, be a “special needs” trust, allowing your son to still qualify for medical assistance.

The Arizona law is found at Arizona Revised Statutes section 14-10819. If you read it, you won’t find the word “decant” anywhere. That’s because the term is favored among trust lawyers, but not in the law itself. No matter — “decanting” is a pretty good description of what the trustee is doing. Basically, the trust’s assets are being poured from one bottle (the old trust) into a new, similar-but-different bottle (the new trust) and gaining new vigor and complexity in the process.

Your scenario might be different. It might be your daughter who is a chronic spendthrift. Perhaps one of your children married a spendthrift. You might even be the trust beneficiary interested in extending the period of the trust, perhaps for creditor protection purposes.

The amount of money might be more or less than the story we have sketched out here. You might be the trustee, or a bank or private fiduciary might have that position. None of that makes much difference — the trustee of an irrevocable Arizona trust can, unless the trust explicitly prohibits it, usually decant to solve real-world problems that have arisen since the trust was initially created.

The idea is not brand-new, nor unique to Arizona. New York adopted a similar law as early as 1992, and almost a dozen states now explicitly permit decanting. Arguably, the power to decant is not dependent on a state law — though trustees from states where there is no statute might be hesitant about testing that theory.

One requirement for Arizona’s decanting statute to be available: the trust must be an Arizona trust. That usually means that one trustee must be in Arizona, though even that might not be necessary in every case. Another requirement: the trustee must have the discretion to make a distribution to or for the benefit of the beneficiary. In other words, if Grandma’s trust required the distribution of all income directly to Junior but did not permit the trustee to ever reach the principal, decanting might not be an option.

Could you force an Arizona trustee to decant if you were the beneficiary’s concerned parent? Probably not. What if you were the beneficiary and desperately wanted the trustee to exercise its power to decant? Probably not again. Could you decant a trust if you were the trustee and the beneficiary? Oops — we’ve run out of space and time (that’s lawyer talk for “it depends”).

Decanting trusts is an interesting and useful idea. It can help “fix” problem trusts, especially where circumstances have changed since the trust was first established. If you know of a current or looming problem with distributions from an Arizona trust, you might want to talk to an experienced trust and estates lawyer about the options available.

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Robert B. Fleming

Attorney

Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman

Attorney

Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson

Attorney

Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

Famous people's wills

Matthew M. Mansour

Attorney

Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.