VOLUME 24 NUMBER 18
When a trustee transfers assets to a new trust with the same beneficiaries (but different terms), it is often called decanting. “Decant” is an analogy: the trustee is, in a sense, pouring trust assets from an old vessel into a new container, and improving the quality of the trust in the process. But when can a trustee decant, and why would he or she want to?
The “Ferguson” Trust
In 1983, Peter Ferguson (not his real name) had an 18-year-old son (we will call him “Junior”). The senior Mr. Ferguson wanted to give his son some money, but not outright; he created a trust in Massachusetts for his son’s benefit. He named a relative and a local lawyer as co-trustees. The trust permitted Junior to insist on distributions of some percentages of its assets, but until he did the funds would remain in the trust. It included a “spendthrift” provision, preventing his creditors from gaining access to trust assets.
In 1995, Junior married. He and his new wife lived together for fifteen years before she filed for divorce.
The trustees decant
Within a few months of the divorce filing, junior’s trustees decided that they should decant the trust into a new, more restrictive trust. The new trust document named the same trustees, and still was for Junior’s benefit. It removed, however, any provision allowing Junior to require distribution of any of the trust’s assets. Prior to the decanting, he had been in a position to direct up to three-quarters of the trust principal be transferred to his own name.
The decanted trust, like the original, was established under Massachusetts law. Junior’s divorce proceeding was in Connecticut. The trustees filed a lawsuit in Connecticut, seeking a determination that the decanting was effective. The served notice on Junior and his wife.
Junior’s wife objected. If he had the power to remove 75% of the trust, that amount would be available in the divorce settlement negotiations. She argued that the trustees exceeded their authority.
The trustees attached to their lawsuit an affidavit from the senior Mr. Ferguson. In it, he recited the reasons he had established the original trust. He specifically mentioned a desire to protect his son from creditors — and divorce courts.
The Connecticut lawsuit
Junior’s wife persuaded the Connecticut trial court to rule in her favor. It found that the trustees did not have authority under Massachusetts law to decant. It noted that Massachusetts has not adopted a statute specifically permitting decanting.
Massachusetts does have a court case allowing decanting of a trust somewhat like Junior’s trust. The trustee’s appealed, arguing that the Connecticut court should have permitted the Massachusetts decanting under the authority of that case. For that matter, they argued, the power to decant is generally available to trustees under the common law.
The Connecticut Supreme Court considered the appeal, but realized that it was being asked to interpret the law of neighboring Massachusetts. The Connecticut judges did something that is permissible under the law, but relatively uncommon; it presented a “certified question” to the highest Massachusetts court.
Under the notion of certified questions, one court asks the high court of another jurisdiction to please determine what the answering court’s law would be regarding the question. That allows the certifying court to correctly apply the law of the answering court, without having to figure out what that law might be.
The certified questions
The Massachusetts Supreme Judicial Court accepted the challenge. Even though the state had not adopted an actual statute permitting decanting, ruled the court, it was a permissible action for Massachusetts trustees. The fact that Junior had the power to withdraw money from the trust — a power which he lost with the decanting — did not change the result.
It was critical to the Massachusetts court’s analysis that the original trust had a spendthrift provision. Because of that, no one — not Junior’s creditors, nor his wife — could compel the trustee’s to make a distribution. Although Junior himself had the power to demand money from the trust, he was not involved in the decanting decision or process.
The Massachusetts justices specifically referred to the senior Mr. Ferguson’s affidavit. It was relevant, they ruled, that his intent in establishing the trust was to protect Junior’s money, and it was appropriate to consider his view now. Of course, he was not in charge of the trust and could not compel (or block) the decision to decant. But his opinion was relevant.
Three justices of the Massachusetts high court agreed with the decision, but wrote a separate, concurring opinion. They wanted to make clear that they were not condoning actions by a divorcing spouse to sequester marital funds. If the trust had not included a spendthrift provision, they noted, they might have ruled differently. It was critically important to them that Junior was not involved in the decision to decant. Ferri v. Powell-Ferri, March 20, 2017
What about Arizona?
Unlike Massachusetts, Arizona does have a statute permitting trust decanting. It is a fairly broad statute, and a decision like the one taken Junior’s trustees would likely be upheld under the Arizona law. One interesting, but unanswered, question in Arizona (and other states with statutory provisions: once a state law is adopted, does it become the sole permissible method for decanting? Stay tuned.