Colorado joined 23 other states when it enacted the Uniform Trust Decanting Act (“Act”) in 2016, C.R.S. §15-16-901, et seq. The Act provides a statutory framework for a trustee to modify an irrevocable trust based on the trustee’s discretionary power to make distributions. (For lay persons, “revocable” trusts are trusts that can be changed; “irrevocable” trusts are ones that by their own terms may not be changed.)
What is Trust Decanting?
Just as one decants wine by gradually pouring it from its bottle into a carafe, the trustee may move trust assets from one trust into a second new trust based on her discretion to make principal distributions to or for the benefit of the beneficiaries. Before Colorado’s Act, trust decanting could only be accomplished in Colorado if the trust document specifically allowed it, or through court order, which was expensive, even if all parties agreed and it would not be challenged.
When is Decanting Allowed?
If the trust allows the trustee to use her judgment regarding when to make principal distributions and among beneficiaries, then decanting might be allowed.
If the trustee has no discretion over principal distributions, then decanting is not allowed. (E.g., the parent provides for mandatory distributions of trust principal to each child at ages 30, 35 and 40.)
When Might Decanting be Useful?
Decanting might be useful in the following situations:
- Name successor trustees, if the document does not provide for them;
- Fix outdated administrative provisions;
- Divide a trust for multiple beneficiaries into separate trusts for individual beneficiaries;
- Include more favorable tax provisions;
- Merge trusts to simplify administration;
- Change a trust situs; and
- Convert a trust into a special needs trust for a beneficiary with a disability.For example, if a beneficiary is in a car accident and begins receiving public benefits (e.g., Medicaid, Social Security Disability Income, etc.), decanting a life insurance trust into a special needs trust could preserve that beneficiary’s ability to receive benefits.
Who May Invoke the Colorado Act?
In order to use the Act, the following factors must exist:
- The trust must have its principal place of administration in Colorado or be governed by Colorado law;
- The trust must be irrevocable;
- The trust may not be solely charitable.
How Drastically May the Trust be Changed?
The trustee’s level of discretion over distributions of trust principal determines the scope of changes the trustee may make.
Limited discretion. If the trustee may distribute under an “ascertainable standard” (for health, education, maintenance, and support), or under a reasonably definite standard, then the trustee may decant to update administrative and trustee provisions but may not change the dispositive structure.
Expanded discretion. If the trustee has sole and absolute discretion or may broadly make distributions for a beneficiary’s happiness, comfort, or welfare, then she may modify beneficial interests, subject to some limitations. The trustee may eliminate but may not add a new beneficiary, and may not remove a vested interest.
What is the Procedure under the Colorado Act?
First, the trustee should have an attorney modify the existing trust document, or draft a new one. Next, the trustee must give notice to the settlor, beneficiaries, successor trustees, and the Attorney General if charitable interests are involved. Notice must describe the change, identify the proposed effective date, and include copies of the original and revised trust document. Unless waived in writing, the notice period is 63 days. Although it is not necessary, practical reasons may exist to obtain court approval.
Please contact our Colorado estate planning attorney if you would like to discuss changes to your trust.