By Harry S. Margolis
In a recent case involving the Kraft family, owners of the New England Patriots, the Massachusetts Supreme Judicial Court approved the “decanting” of assets from an old irrevocable trust to a new one.
The trustees of a Kraft family trust in Morse v. Kraft, Case No. SJC-11233, 2013 Mass. LEXIS 629 (July 29, 2013), petitioned the SJC to ask if they had authority to transfer funds into a new trust that would better serve the interests of the family. Their petition was supported by an amicus brief submitted by the Boston Bar Association.
Decanting traditionally refers to the practice of pouring old wine out of its bottle into a carafe in advance of imbibing it both to avoid drinking sediments that may have settled in the old bottle and to aerate the wine to improve its taste. Perhaps since only families of wealth can afford such fine wine, the term has been adopted by trusts and estates attorneys to describe the process of improving the terms of irrevocable trusts by transferring funds to newer versions that may correct problems that may have arrised with older ones.
The question is whether state trust law permits this practice. If not, doing so could be open to challenge by even remote beneficiaries or by the Internal Revenue Service if the change reduces estate or taxes.
In this case, the SJC rules that the Kraft trust may be decanted to another trust without the approval of the beneficiaries under provisions of the trust giving the trustee broad discretion to make distributions to the beneficiaries or for their benefit. However, the SJC did not go so far as to agree with the BBA’s proposal that it “recognize an inherent power of trustees of irrevocable trusts to exercise their distribution authority by distributing trust property in further trust, irrespective of the language of the trust.”
In addition, while the SJC permitted decanting in this case, it signaled that it may not do so in the future without a specific grant of the power in trust: “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, it behooves drafters of irrevocable trusts in the future to provide flexibility to their clients by including decanting provisions. Generally, this is unnecessary for revocable trusts since by their very nature grantors can change these trusts at will. However, if the revocable trust is intended to continue after the grantor’s trust, it still may make sense to include a decanting provision to provide flexibility in the event of unforeseen circumstances that may arise after the grantor’s death or incapacity.