Circumstances change. Trusts often are not adaptable to those changes. Sometimes trusts run for many years, or even decades. Increasingly, lawyers and trustees turn to trust decanting as a means of updating older trust language.
What is trust decanting?
Decanting is a relatively recent idea in trust administration. In some circumstances, a trustee may be able to create a new trust for the same beneficiary. The trustee can then transfer assets to the new trust. Problems — often unforeseen when the trust was first established — can magically disappear.
Trust decanting takes its name from the idea of pouring old wine into a new vessel. Just as flaws in the old container may be remedied by decanting, a trust can be updated by the act of decanting.
Arizona, like many states, has adopted a decanting statute. It is quite simple, and gives terrific discretion to the trustee. There are, however, a few limitations on use of the tool.
A recent Arizona Court of Appeals case on the Arizona statute reviewed the law for the first time. The case involved a family dispute that may not have been earth-shattering, but it does give some insight into the limits of trust decanting.
The Sibley trust
In 1986, Yuma residents Phil and Lucille Sibley created a trust to hold all of their property. They named themselves as trustees, and made the trust revocable so long as they were still alive. Phil died in 2004. When Lucille died more than a decade later, her will instructed that the family’s farmland should stay in trust for the couple’s three children.
Lucille’s will ordered the farmland held in the trust until her youngest great-grandchild reached age 21. In the intervening years, all the net income from the farmland was to be distributed to the three children or, on their deaths, to grandchildren. On the youngest great-grandchild’s 21st birthday, the trust would terminate and the farmland would be distributed to the children (or, if any of them had died, to their offspring).
Lucille’s trust named two of her children as co-trustees. Those two children wanted to update the language to a more modern version. The third child disagreed. He wanted to simply divide the farmland up and give a third to each of the siblings.
The trustees filed a petition with the probate court for approval of the proposed trust decanting. The probate judge agreed that it made sense, and entered an order approving the request.
The court of appeals decision
All three children appealed. In an opinion issued last month, the Arizona Court of Appeals reversed the probate court’s decision on trust decanting. The appellate court explained the limitations of the trustee’s power to decant.
Arizona’s statute allows decanting whenever the trust gives the trustee discretion to distribute principal to a beneficiary. The key is that the trustee has to have authority to make a distribution in order to distribute to a new (decanted) trust.
The problem with Ms. Sibley’s trust? The co-trustees had no authority to distribute the farmland itself — they could only distribute the farm’s income. Therefore, they could not update the trust by decanting.
The other issue in Ms. Sibley’s will/trust
The case actually addressed an almost completely unrelated issue, as well. Ms. Sibley’s will, which exercised her power over the trust, had language that could be viewed as ambiguous. The language of her will included the phrase “it is my desire” or “I desire” in two key places:
“It is my desire that the real property (farmland) … be held in further trust,” her will said. Later, she wrote “I desire that the farmland not be sold until my youngest great-grandchild reaches the age of twenty-one.”
Did those “desires” amount to an actual bequest, or were they merely suggestions that she hoped her children would follow? The two co-trustees insisted that they only made sense as direct commands. The third sibling argued that they were free to disregard her “desires.” More to the point, the third child insisted that the will gave him permission to ignore those desires.
The probate court had ruled that the language of the will was actually mandatory. In other words, Ms. Sibley had effectively created a trust.
The appellate court decision agreed with the probate judge on this point. Taking the language of her will as a whole, it was clear to the Court of Appeals that Ms. Sibley intended to put the farmland into the trust. Estate of Sibley, July 26, 2018.
What are the broader messages?
Trust decanting is a powerful and flexible tool. Arizona’s broad decanting statute is not always available, however.
More careful drafting might well have avoided the problems with Ms. Sibley’s trust and will. She could, for example, have specifically included a power to decant to include updated administrative provisions. Rather than expressing her “desires”, the will could have clearly mandated transfer of the farmland into a trust. Either of those improvements could at least have limited the legal costs ultimately incurred in interpreting her documents.