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“Decanting” and Other Means of Amending Irrevocable Trusts

Irrevocable trusts - decanting- margolis-bloom-dagostino-wellesley

Irrevocable trusts by definition can’t be amended, right? And “decanting” is a process of pouring fine wine into a carafe to allow it to “breath” and make sure connoisseurs don’t end up drinking the dregs and sediment that may have settled in the bottle?

It turns out that neither is totally true, at least not anymore. “Decanting” is now one of several methods that irrevocable trusts can modify if they no longer satisfy their original purpose. Here’s a primer and a chart to guide the use of one or more or these tools:

Decanting

Decanting is the act of transferring the assets of an existing trust into a new trust that better meets the goals of the original trust. This may be necessary where new tax or other laws interfere with the operation of the trust. In the seminal case on decanting in Massachusetts involving the New England Patriots Kraft family, Morse v. Kraft (466 Mass. 92, 2013), the Supreme Judicial Court ruled that trustees may transfer trust assets to another trust without the approval of the beneficiaries where they have broad discretion to make distributions to the beneficiaries or for their benefit.

However, the SJC also indicated that this may only work with older trusts, saying: “In light of the increased awareness, and indeed practice, of decanting, we expect that settlors in the future who wish to give trustees a decanting power will do so expressly. We will then consider whether failure to expressly grant this power suggests an intent to preclude decanting.” So far, there has been no decision on whether trustees of post-2013 trusts can decant without specific decanting provisions included in the trusts.

Many states have adopted statutes governing when and how decanting may take place. So far, Massachusetts just has the Kraft decision, though a statute has been proposed.

Non-Judicial Settlement Agreement

While Massachusetts does not have a decanting statute, as part of the Uniform Trust Act it has a statute permitting a “non-judicial settlement agreement” (NJSA) to modify an existing trust at M.G.L. Ch. 203E, Sec. 111 as long as it “does not violate a material purpose of the trust.” Unlike decanting, an NJSA requires the “interested persons” to agree to the change. It’s not totally clear who is included in the term “interested persons,” but it probably means the grantor or grantors if they’re still alive and all non-contingent beneficiaries.

“Non-contingent” means that the beneficiary’s rights are definite. For instance, the rights of a child in a trust that says that it’s for the benefit of a parent during their life and then will pass to the child are non-contingent, and such a child must be included as a party to the NJSA. However, if the parent has a power of appointment under which they may redirect what happens to the trust property upon their death, then the child’s right is contingent and they do not have to be a party to the NJSA.

When a child is a minor, a parent as their natural guardian my sign an NJSA on their behalf as long as their interests align, but not if they don’t. So, for instance, if the purpose of the trust amendment is to save taxes, that’s in everyone’s interest and the parent can sign for their minor child. But if the trust amendment were to add an additional beneficiary upon the parent’s death, reducing the child’s interest, then they cannot sign for the child.

Trust Reformation

When the decanting or NJSA methods of revising an existing trust are unavailable, parties can always go to the probate court to reform the trust by court order. This may be necessary when one or more non-contingent beneficiaries are incapacitated or can’t be located, when the parties are not in agreement, or when the original trust instrument cannot be located.

The benefit of a trust reformation in court is that it eliminates any questions about whether particular change is permitted pursuant to the Kraft case or the Uniform Probate Court or whether all the necessary parties have been included. The downside of going to court, in addition to the cost and delay, is the unpredictability of judges. We’ve seen different judges come to completely different conclusions on very similar requests for trust reformation.

By Trustee or Trust Protector

Some “irrevocable” trusts are not entirely irrevocable. While they may not be revoked or amended by the grantor, they may permit the trustee or a third party, often referred to as a “trust protector,” to make changes. In these cases, the extent of the modifications that may be made is determined by the trust itself. For instance, a special needs trust may permit the trustee to amend the trust just to the extent necessary to preserve the beneficiary’s eligibility for public benefits such as MassHealth and Supplemental Security Income. In such cases, if the laws or their interpretation change in a way that no longer protects the trust assets, the trustee can make any changes needed for the trust to stay in compliance without having to go to court.

The Chart

Here’s a cheat sheet for determining which method of trust modification to use in which circumstances:

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